See accompanying notes.
Under Armour, Inc. and Subsidiaries
See accompanying notes.
Under Armour, Inc. and Subsidiaries
See accompanying notes.
Under Armour, Inc. and Subsidiaries
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
1. Description of the Business
Under Armour, Inc. and its wholly owned subsidiaries (the "Company") is a developer, marketer and distributor of branded athletic performance apparel, footwear, and accessories. These products are sold worldwide and wornPowered 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 FitnessTM platform powersone of the world's largest digital healthdigitally connected fitness and fitness community.wellness communities, the Company's innovative products and experiences are designed to help advance human performance, making all athletes better. 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 unaudited consolidated financial statements include the accounts of Under Armour, Inc. and its wholly owned subsidiaries (the “Company”).the Company. Certain information in footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim consolidated financial statements. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement of the financial position and results of operations were included. Intercompany balances and transactions were eliminated. The consolidated balance sheet as of December 31, 20162018 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 20162018 (the “2016“2018 Form 10-K”), which should be read in conjunction with these consolidated financial statements. The results for the three and nine months ended September 30, 2017,2019, are not necessarily indicative of the results to be expected for the year ending December 31, 20172019, or any other portions thereof.
On June 3, 2016,During the Boardsecond quarter of Directors approved2019, the payment of a $59.0 million dividendCompany recorded an adjustment related to the holders of the Company's Class C stockprior periods to correct unrecorded consulting expenses incurred primarily in connection with shareholder litigationthe 2018 restructuring plan. Selling, general and administrative expenses for the nine months ended September 30, 2019 includes $5.5 million of expense that was understated in prior periods. The Company concluded that the error was not material to any prior or interim periods presented.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. The Company's restricted cash is reserved for payments related to claims for its captive insurance program, which is included in prepaid expenses and other current assets on the creationCompany's unaudited consolidated balance sheets. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Class C stock. The Company's Boardunaudited consolidated balance sheets to the unaudited consolidated statements of Directors approved the payment of this dividend in the form of additional shares of Class C stock, with cash in lieu of any fractional shares. This dividend was distributed on June 29, 2016, in the form of 1,470,256 shares of Class C stock and $2.9 million in cash.flows.
| | | | | | | | | | | | | | | | | |
| (In thousands) | September 30, 2019 | | December 31, 2018 | | September 30, 2018 |
| Cash and cash equivalents | $ | 416,603 | | | $ | 557,403 | | | $ | 168,682 | |
| Restricted cash | 11,002 | | | 8,657 | | | 7,858 | |
| Total Cash, cash equivalents and restricted cash | $ | 427,605 | | | $ | 566,060 | | | $ | 176,540 | |
Concentration of Credit Risk
Financial instruments that subject the Company to significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable is due from large retailers. Credit is extended based on an evaluation of each customer’s financial condition and collateral is not required. Thecondition. One of the Company's largest customercustomers accounted for 13.1%, 16.0% and 20.2%10% of accounts receivable as of September 30, 2017,2019. None of the Company's customers accounted for more than 10% of accounts receivable as of December 31, 20162018 and September 30, 2016,2018, respectively. For the three and nine months ended September 30, 2017,2019 and 2018, no customer accounted for more than 10% of the Company's net revenues.
Sale of Accounts Receivable
In 2018, the Company entered into agreements with two financial institutions to sell selected accounts receivable on a recurring, non-recourse basis. In 2019, the Company amended one agreement to reduce the facility
amount. Under each agreement, the Company may sell up to $140.0 million and $50.0 million, respectively, provided the accounts receivable of certain customers cannot be outstanding simultaneously with both institutions. Balances may remain outstanding at any point in time. The Company removes the sold accounts receivable from the unaudited 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 institutions.
As of September 30, 2019, December 31, 2018 and September 30, 2018, no amounts remained outstanding. The funding fee charged by the financial institutions is included in the other income (expense), net line item in the consolidated statement of operations.
Allowance for Doubtful Accounts
As of September 30, 2019, December 31, 2018, and September 30, 2018, the allowance for doubtful accounts was $16.5 million, $22.2 million and $24.0 million, respectively.
Revenue Recognition
Net revenues consist of net sales, license and Connected Fitness revenue. Net sales are recognized upon transfer of control, including passage of title to the customer and transfer of risk of loss related to those goods. Payment is due in full when title is transferred. Transfer of title and risk of loss 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 customer and recognize revenue when the product is delivered to and accepted by the customer. License revenue is primarily recognized based upon shipment of licensed products sold by the Company's licensees. Sales taxes imposed on the Company’s revenues from product sales are presented on a net basis on the consolidated statements of income, and therefore do not impact net revenues or costs of goods sold.
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 obligations with certain major customers. Reserves for returns, allowances, markdowns and discounts are included within customer refund liability and the value of inventory associated with reserves for sales returns are included within prepaid expenses and other current assets on the consolidated balance sheet.
Contract Liabilities
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 primarily consist of payments received in advance of revenue recognition for subscriptions for the Company's Connected Fitness applications and royalty arrangements, included in other current liabilities, and gift cards, included in accrued expenses, on the Company's unaudited consolidated balance sheets. As of September 30, 2019, December 31, 2018, and September 30, 2018, contract liabilities were $60.6 million, $55.0 million and $31.9 million, respectively.
For the three and nine months ended September 30, 2016,2019, the Company recognized $9.2 million and $22.6 million of revenue that was previously included in contract liabilities as of December 31, 2018. For the three and nine months ended September 30, 2018, the Company recognized $4.5 million and $19.7 million of revenue that was previously included in contract liabilities as of December 31, 2017. The change in the contract liabilities balance primarily results from the timing differences between the Company's largestsatisfaction 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 accountedhas 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 11.0%subscriptions for its Connected Fitness applications as they have an original expected length of net revenues.
Allowance for Doubtful Accounts
As of September 30, 2017, December 31, 2016 and September 30, 2016, the allowance for doubtful accounts was $13.1 million, $11.3 million and $33.6 million, respectively.one year or less.
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 handlingincurs freight costs associated with shipping goods to customers. These costs are recorded as a component of selling, general and administrative expenses. Outboundcost of goods sold.
The Company also incurs outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These costs included withinare recorded as a component of selling, general and administrative expenses and were $25.5$20.8 million and $25.7$24.2 million for the three months ended September 30, 20172019 and 2016,2018, respectively, and $74.5$63.0 million and $65.1$70.2 million for the nine months ended September 30, 20172019 and 2016,2018, respectively.
Equity Method Investment
In April 2018, the Company invested ¥4.2 billion or $39.2 million in exchange for an additional 10% common stock ownership in Dome Corporation ("Dome"), the Company's Japanese licensee. This additional investment brought the Company's total investment in Dome's common stock to 29.5%, from 19.5%. The Company includes outbound freight costs associatedaccounts for its investment in Dome under the equity method, given it has the ability to exercise significant influence, but not control, over Dome.
As of September 30, 2019, the carrying value of the Company’s total investment in Dome was $47.4 million. The Company's proportionate share of Dome's net assets exceeded its total investment by $63.8 million, which was determined at the time of the investment in April 2018, and is not amortized. For the three and nine months ended September 30, 2019 and 2018, the Company recorded the allocable share of Dome’s net income (loss) in its consolidated statements of operations and as an adjustment to the invested balance.
In addition to the investment in Dome, the Company has a license agreement with shipping goods to customers as a componentDome. The Company recorded license revenues from Dome of cost$9.2 million and $9.2 million for the three months ended September 30, 2019 and 2018, respectively, and $20.9 million and $22.9 million for the nine months ended September 30, 2019 and 2018, respectively. As of goods sold.September 30, 2019, December 31, 2018, and September 30, 2018, the Company had $9.1 million, $13.1 million, and $9.0 million, respectively, in licensing receivables outstanding, recorded in the prepaid expenses and other current assets line item within the Company's unaudited consolidated balance sheets.
Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
During the three months ending September 30, 2017, as a change in estimate, the Company reversed $12.3 million of incentive compensation accruals relating to the first two quarters of 2017.
Recently Issued Accounting Standards
In May 2014,June 2016, the Financial Accounting Standards Board (“FASB”Boards ("FASB") issued Accounting Standards Update ("ASU") 2014-09, which supersedes the most current revenue recognition requirements.ASU 2016-13 - Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU requires entitiesamends the impairment model to recognizeutilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses. The new standard applies to financial assets measured at amortized cost basis, including receivables that result from revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. Thistransactions. The ASU will beis effective for annualfiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with2019, and early adoption is permitted for annual and interim periodsfiscal years beginning after December 15, 2016 permitted.2018. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
The Company’s initial assessmentRecently Adopted Accounting Standards
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, an update that amends and simplifies certain aspects of the guidance in this ASU has identified wholesale customer support costs, directhedge accounting rules to consumer incentive programs and customer related returns as transactions potentially affected by this guidance. While the Company has not completed its evaluation, it expectsincrease transparency of the impact of risk management activities in the adoption offinancial statements. The Company adopted this ASU would primarily change presentation within ouron January 1, 2019. There was no material impact to the Company's 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,
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), 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 requirerequires disclosures that provide qualitative and quantitative information for the lease assets and liabilities recorded in the financial statements. This ASU is effective for fiscal years beginning after December 15, 2018. The Company is currently evaluatingadopted this ASU to determineand related amendments on January 1, 2019, and has elected certain practical expedients permitted under the impact of its adoption on its consolidated financial statements.transition guidance. The Company currently anticipates adoptingelected the new standard effective January 1, 2019.optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. As permitted, the Company did not reassess whether existing contracts are or contain leases, the lease classification for any existing leases, initial direct costs for any existing leases and whether existing land easements and rights of way, which were not previously accounted for as leases, are leases. The Company has formedimplemented a committee and initiatednew lease system in connection with the review process for adoption of this ASU. While theThe Company is still in the processhas operating lease right-of-use assets of completing its analysis$595.8 million and operating lease liabilities of $707.9 million on the complete impact this ASU will have on itsCompany's unaudited consolidated financial statementsbalance sheets as of September 30, 2019. The difference between the operating lease right-of-use assets and related disclosures, it expectsoperating lease liabilities primarily represents the ASUexisting deferred rent and tenant improvement allowance liabilities balance, resulting from historical straight-lining of operating leases, which were effectively reclassified upon adoption to have areduce the measurement of the leased assets. There was no material impact on its consolidated balance sheet for recognition of lease-related assets and liabilities.
In August 2017, the FASB issued ASU 2017-12, which simplifies the application of hedge accounting and more closely aligns hedge accounting with companies' risk management strategies, thereby making more hedging strategies eligible for hedge accounting. This ASU will be effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact this ASU will have on its financial statements and related disclosures.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU 2016-09, which affects all entities that issue share-based payment awards to their employees. The amendments in this ASU cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures and the classification of those taxes paid on the statement of cash flows. The Company adopted the provisions of this ASU on January 1, 2017 on a prospective basis and recorded an excess tax deficiency of $1.3 million as an increase in income tax expense related to share-based compensation for vested awards. Additionally, the Company made a policy election under the provisions of this ASU to account for forfeitures when they occur rather than estimating the number of awards that are expected to vest. As a result of this election, the Company recorded a $1.9 million cumulative-effect benefit to retained earnings as of the date of adoption. The Company adopted the provisions of this ASU related to changes on the Consolidated Statement of Cash Flows on a retrospective basis.
Excess tax benefits and deficiencies have been classified within cash flows from operating activities and employee taxes paid for shares withheld for income taxes have been classified within cash flows from financing activities on the Consolidated Statement of Cash Flows. This resulted in an increase of $44.4 million to the cash flows from operating activities sectionconsolidated statements of operations and no cumulative earnings effect adjustment upon adoption. Refer to Note 4 for a decreasediscussion of $13.7 million to the cash flows from financing activities section of the Consolidated Statement of Cash Flows for the nine months ended September 30, 2016.leases.
In October 2016, the FASB issued ASU 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted the provisions of this ASU on a modified retrospective basis on January 1, 2017, resulting in a cumulative-effect benefit to retained earnings of $26.0 million as of the date of adoption.
In January 2017, the FASB issued ASU 2017-04, which simplifies how an entity is required to test goodwill for impairment by eliminating step two of the test. The Company adopted the provisions of this ASU on July 1, 2017, and recorded an impairment charge of $28.6 million during its interim goodwill impairment test for the Connected Fitness reporting unit.
3. Restructuring and Impairment
A description of significant restructuringAs previously announced, in both 2017 and related impairment charges is included below:
Restructuring
On July 27, 2017,2018, the Company’sCompany's Board of Directors approved a restructuring planplans (the “restructuring plan”"2017 restructuring plan" and the "2018 restructuring plan") designed to more closely align its financial resources with the critical priorities of the business. The Company’s original expectation was to incur estimated pre-taxbusiness and optimize operations. All restructuring and related charges of approximately $110.0 to $130.0 million forunder the year endedplans were incurred by December 31, 2017. In the third quarter of 2017, the Company recognized approximately $59.9 million of pre-tax charges in connection with this restructuring plan, which included $31.2 million of asset impairments and $28.7 million of restructuring related charges including employee related severance, contract terminations and other restructuring related costs. In addition to these charges, the Company also recognized restructuring related goodwill impairment charges of approximately $28.6 million for its Connected Fitness business which was not included in the Company’s original range estimate. Inclusive of the goodwill impairment, the Company now expects to incur total pre-tax restructuring and related charges of approximately $140.0 to $150.0 million for the year ending December 31, 2017.
Impairment
As a part of the restructuring plan, the Company abandoned the use of several assets included within Property and Equipment, resulting in an impairment charge of $14.4 million, reducing the carrying value of these assets to their estimated fair values. Fair value was estimated using an income-approach based on Management’s forecast of future cash flows expected to be derived from the assets' use.
Additionally, in connection with the restructuring plan, strategic decisions were made during the third quarter in 2017 to abandon the use of certain intangible assets in the Company's Connected Fitness reporting unit. These intangible assets included technology and brand names, resulting in total intangible asset impairment charges of $12.1 million, reducing the carrying value of these assets to their estimated fair values. Fair value was estimated using an income-approach based on management’s forecast of future cash flows expected to be derived from the assets use. In addition, the Company also made the strategic decision to not pursue certain other planned future revenue streams in connection with the restructuring plan.
The Company determined sufficient indication existed to trigger the performance of an interim goodwill impairment for Company’s Connected Fitness reporting unit. Using updated cash flow projections, the Company calculated the fair value of the Connected Fitness reporting unit based on the discounted cash flows model. The carrying value exceeded the fair value, resulting in an impairment of goodwill. As the excess of the carrying value for the Connected Fitness reporting unit was greater than the goodwill for this reporting unit, all $28.6 million of goodwill was impaired.2018.
The summary of the costs incurred during the three and nine months ended September 30, 2017,2018 in connection with the 2018 restructuring plan is as well as the Company’s current estimatesfollows:
| | | | | | | | | | | |
| (In thousands) | Three Months Ended
September 30, 2018 | | Nine Months Ended September 30, 2018 |
| Costs recorded in cost of goods sold: | | | |
| Inventory write-offs | $ | 5,687 | | | $ | 19,101 | |
| Total costs recorded in cost of goods sold | 5,687 | | | 19,101 | |
| | | |
| Costs recorded in restructuring and impairment charges: | | | |
| Property and equipment impairment | 271 | | | 12,235 | |
| Employee related costs | 8,110 | | | 8,110 | |
| Other restructuring related costs | 6,516 | | | 26,238 | |
| Contract exit costs | 3,704 | | | 88,337 | |
| Total costs recorded in restructuring and impairment charges | 18,601 | | | 134,920 | |
| Total restructuring, impairment and restructuring related costs | $ | 24,288 | | | $ | 154,021 | |
A summary of the amount expectedactivity in the restructuring reserve related to be incurred during the remainder ofCompany's 2017 areand 2018 restructuring plans is as follows:
|
| | | | | | | | | | | | | | | | |
| | Restructuring and Impairment Charges incurred | Estimated Restructuring and Impairment Charges to be Incurred |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended December 31, | | Total | |
| (In thousands) | 2017 | | 2017 | | 2017 (2) | | 2017 (2) | |
| Costs recorded in cost of goods sold: | | | | | | | | |
| Inventory write-offs (1) | $ | 3,597 |
| | $ | 3,597 |
| | $ | — |
| | $ | 3,597 |
| |
| Total costs recorded in cost of goods sold | 3,597 |
| | 3,597 |
| | — |
| | 3,597 |
| |
| | | | | | | | | |
| Costs recorded in restructuring and impairment charges: | | | | | | | | |
| Goodwill impairment | 28,647 |
| | 28,647 |
| | — |
| | 28,647 |
| |
| Property and equipment impairment | 14,415 |
| | 14,415 |
| | — |
| | 14,415 |
| |
| Employee related costs | 11,657 |
| | 12,159 |
| | 3,000 |
| | 15,159 |
| |
| Intangible asset impairment | 12,054 |
| | 12,054 |
| | — |
| | 12,054 |
| |
| Other restructuring related costs | 12,603 |
| | 15,200 |
| | 23,000 |
| | 38,200 |
| |
| Contract exit costs | 5,622 |
| | 5,622 |
| | 31,000 |
| | 36,622 |
| |
| Total costs recorded in restructuring and impairment charges | 84,998 |
| | 88,097 |
| | 57,000 |
| | 145,097 |
| |
| Total restructuring, impairment and restructuring related costs | $ | 88,595 |
| | $ | 91,694 |
| | $ | 57,000 |
| | $ | 148,694 |
| |
| | | | | | | | | | | | | | | | | |
| (In thousands) | Employee Related Costs | | Contract Exit Costs | | Other Restructuring Related Costs |
| Balance at January 1, 2019 | $ | 8,532 | | | $ | 71,356 | | | $ | 4,876 | |
| Additions charged to expense | — | | | — | | | — | |
| Cash payments charged against reserve | (5,727) | | | (14,889) | | | (4,794) | |
| Reclassification to operating lease liabilities (1) | — | | | (30,572) | | | — | |
| Changes in reserve estimate | (961) | | | (301) | | | — | |
| Balance at September 30, 2019 | $ | 1,844 | | | $ | 25,594 | | | $ | 82 | |
(1) This table includesCertain restructuring reserves have been reclassified to operating lease liabilities on the unaudited consolidated balance sheets in connection with the adoption of ASU 2016-02.
4. 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 2035, excluding extensions at the Company's option, and include provisions for rental adjustments.
Right-of-use assets and lease liabilities are established on the unaudited consolidated balance sheets for leases with an additional non-cash chargeexpected term greater than one year. As the rate implicit in the lease is not readily determinable, the Company uses its secured incremental borrowing rate to determine the present value of $3.6the lease payments. Leases with an initial term of 12 months or less are not recorded on the unaudited consolidated balance sheets.
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 $37.6 million and $113.4 million for the three and nine months ended September 30, 2017 associated2019, respectively, under non-cancelable operating lease agreements.
Variable lease payments primarily consist of payments dependent on sales in brand and factory house stores. Short-term and variable lease payments are recorded in selling, general, and administrative expenses and are not material. 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:
| | | | | |
| September 30, 2019 |
| Weighted average remaining lease term (in years) | 6.96 |
| Weighted average discount rate | 4.29 | % |
Supplemental cash flow and other information related to leases was as follows:
| | | | | |
| (In thousands) | Nine months ended September 30, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities | |
| Operating cash outflows from operating leases | $ | 83,183 | |
| Leased assets obtained in exchange for new operating lease liabilities | 47,832 | |
Maturities of lease liabilities are as follows:
| | | | | |
| (In thousands) | |
| 2019 | $ | 44,134 | |
| 2020 | 141,983 | |
| 2021 | 128,259 | |
| 2022 | 116,370 | |
| 2023 | 103,477 | |
| 2024 and thereafter | 295,916 | |
| Total lease payments | $ | 830,139 | |
| Less: Interest | 122,203 | |
| Total present value of lease liabilities | $ | 707,936 | |
As of September 30, 2019, the Company has additional operating lease obligations that have not yet commenced of approximately $344.1 million, which are not reflected in the table above. These relate to retail store lease obligations commencing in 2020 with lease terms up to 15 years, and primarily relate to a flagship store.
The following is a schedule of future minimum lease payments for non-cancelable real property and equipment operating leases as of December 31, 2018, as well as significant operating lease agreements entered into during the reduction of inventory outside of current liquidation channels in line withperiod after December 31, 2018 through the restructuring plan.
(2) Estimated restructuring and impairment charges to be incurred reflect the high-enddate of the range of the estimated remaining charges expected to be taken by the Company during 2017 in connection with the restructuring plan.2018 Form 10-K:
| | | | | |
| (In thousands) | |
| 2019 | $ | 142,648 | |
| 2020 | 148,171 | |
| 2021 | 154,440 | |
| 2022 | 141,276 | |
| 2023 | 128,027 | |
| 2024 and thereafter | 699,262 | |
| Total future minimum lease payments | $ | 1,413,824 | |
4.
5. Long Term Debt
Credit Facility
TheOn March 8, 2019, the Company is party to aentered into an amended and restated credit agreement thatby and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, PNC Bank, National Association, as syndication agent and the other lenders and arrangers party thereto (the "credit agreement"), amending and restating the Company's prior credit agreement. The credit agreement has a term of five years, maturing in March 2024, with permitted extensions under certain circumstances, and provides revolving credit commitments forof up to $1.25 billion of borrowings, as well asbut 0 term loan commitments, in each case maturing in January 2021.borrowings, which were provided for under the prior credit agreement. As of September 30, 2017,2019, there was $270.0 millionwere 0 amounts outstanding under the revolving credit facility. As of December 31, 2018, there were 0 amounts outstanding under the revolving credit facility and $167.5$136.3 million of term loan borrowings outstanding.
At the Company's request and the lender's consent, revolving and or term loan borrowings may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the credit agreement, as amended. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time In January 2019, the Company seeks to incur such borrowings.prepaid the outstanding balance of $136.3 million on its term loans, without penalty.
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 $4.6$5.1 million of letters of credit outstanding as of September 30, 2017.2019.
The credit agreement contains negative covenants that subject to significant exceptions, limit the Company's ability ofto engage in certain transactions, as well as financial covenants that require the Company and its subsidiaries to among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactionscomply with affiliates. The Company is also required to maintain a ratio of consolidated EBITDA, as defined in the credit agreement, to consolidated interest expense of not less than 3.50 to 1.00 and is not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.00 ("specific consolidated leverage ratio"). The method of calculating these ratios is set forth in the Company's credit agreement and differs from how rating agencies or other companies may calculate similar measures.interest coverage ratios. As of September 30, 2017,2019, the Company was in compliance with these ratios. In addition, the credit agreement contains events of default that are customary for a facility of this nature, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the credit agreement, will be considered an event of default under the credit agreement.
Borrowings under the credit agreement bear interest at a rate per annum equal to, at the Company’s option, either (a) an alternate base rate, or (b) a rate based on the rates applicable for deposits in the interbank market for
U.S. Dollars or the applicable currency in which the loans are made (“adjusted LIBOR”), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “Pricing Grid”) based on the consolidated leverage ratio and ranges between 1.00% to 1.25% for adjusted LIBOR loans and 0.00% to 0.25% for alternate base rate loans. During the three months ended September 30, 2019, there were no borrowings under the revolving credit facility. The weighted average interest ratesrate under the revolving credit facility borrowings was 3.3% during the three months ended September 30, 2018, and 3.6% and 3.0% for the nine months ended September 30, 2019 and 2018, respectively. During the three and nine months ended September 30, 2019, there were no borrowings under the outstanding term loansloan. The weighted average interest rate under the outstanding term loan was 3.3% and revolving credit facility borrowings were 2.4% and 2.2%3.1% during the three and nine months ended September 30, 2017,2018, respectively. The Company pays a commitment fee on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit. As of September 30, 2017,2019, the commitment fee was 15.0 basis points. Since inception, theThe Company incurred and deferred $3.9$3.5 million in financing costs in connection with the credit agreement.
3.250% Senior Notes
In June 2016, the Company issued $600.0 million aggregate principal amount of 3.250% senior unsecured notes due June 15, 2026 (the “Notes”). The proceeds were used to pay down amounts outstanding under the revolving credit facility. Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes), theThe Company may redeem some or all of the Notes at any time, or from time to time, at a redemption price equal to the greater of 100% of the principal amount of the Notes to be redeemed or a “make-whole” amount applicable to such Notes 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.
Notes. The indenture governing the 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 has incurred and deferred $5.3 million in financing costs in connection with the Notes.
Other Long Term Debt
In December 2012, the Company entered into a $50.0 million recourse loan collateralized by the land, buildings and tenant improvements comprising the Company's corporate headquarters. TheIn July 2018, this 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 prepaymentwas paid in full, without penalty. The loan includes covenants and events of default substantially consistent withpenalties, using borrowings under the Company's revolving credit agreement discussed above. The loan also requires prior approval of the lender for certain matters related to the property, including transfers of any interest in the property. As of September 30, 2017, December 31, 2016 and September 30, 2016, the outstanding balance on the loan was $40.5 million, $42.0 million and $42.5 million, respectively. The weighted average interest rate on the loan was 2.7% and 2.5% for the three and nine months ended September 30, 2017, respectively.facility.
Interest expense, net, was $9.6$5.7 million and $8.2$9.2 million for the three months ended September 30, 20172019 and 2016,2018, respectively, and $25.2$15.9 million and $18.5$26.3 million for the nine months ended September 30, 2017,2019 and 2016,2018, 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.
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.
5.6. Commitments and Contingencies
There were no significant changes to the contractual obligations reported in the 20162018 Form 10-K other than those which occur in the normal course of business.
In connection with various contracts and agreements, the Company has agreed to indemnify counterparties against certain third party claims relating to the infringement of intellectual property rights and other items. Generally, such indemnification obligations do not apply in situations in which the counterparties are grossly negligent, engage in willful misconduct, or act in bad faith. Based on the Company’s historical experience and the estimated probability
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.
Securities Class Action
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 “District Court”) were consolidated under the caption In re Under Armour Securities Litigation,, Case No. 17-cv-00388-RDB (the “Consolidated Action”). On August 4, 2017, the lead plaintiff in the Consolidated Action, North East Scotland Pension Fund, (“NESFP”),joined by named plaintiff Bucks County
Employees Retirement Fund, filed a consolidated amended complaint (the “Amended Complaint”) against the Company, the Company’s Chief Executive Officer and former Chief Financial Officers Lawrence Molloy and Brad Dickerson. The Amended Complaint alleges violations of Section 10(b) (and Rule 10b-5) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 20(a) control person liability under the Exchange Act against the officers named in the Amended Complaint, claiming that the defendants made material misstatements and omissions regarding, among other things, the Company's growth and consumer demand for certain of the Company's products. The class period identified in the Amended Complaint is September 16, 2015 through January 30, 2017.
A new plaintiff, Bucks County Employees Retirement Fund (“Bucks County”), joined NESFP in filing the The Amended Complaint. In addition to joining the claims noted above, Bucks CountyComplaint also asserts claims under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), in connection with the Company’s public offering of senior unsecured notes in June 2016. The Securities Act claims are asserted against the Company, the Company’s Chief Executive Officer, Mr. Molloy, the Company’s directors who signed the registration statement pursuant to which the offering was made and the underwriters that participated in the offering. Bucks CountyThe Amended Complaint alleges that the offering materials utilized in connection with the offering contained false and/or misleading statements and omissions regarding, among other things, the Company’s growth and consumer demand for certain of the Company’s products.
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. The lead plaintiff 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 on January 17, 2019. On August 19, 2019, the District Court dismissed the Second Amended Complaint with prejudice.
In September 2019, the lead plaintiff in the Consolidated Action 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"). Briefing in connection with the Appeal is expected to be completed by the end of 2019. The Company believescontinues to believe that the claims asserted in the Consolidated Action and the Appeal are without merit and intends to defend the lawsuit vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of the outcome of this matter.
Patel v. Under Armour, Inc.
On November 6, 2019, a purported shareholder of the Company filed a securities case in the United States District Court for the District of Maryland against the Company and the Company’s Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer, as well as a former Chief Financial Officer of the Company (captioned Kirtan Patel v. Under Armour, Inc., No 1:19-cv-03209-RDB). The complaint alleges 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 complaint. The complaint claims that the defendants’ 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 United States Department of Justice and the United States Securities and Exchange Commission since July 2017. The class period identified in the complaint is August 3, 2016 through November 1, 2019, inclusive.
The Company has not yet been served with the complaint. The Company believes that the claims are without merit and, once served, 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.
Derivative Complaints
In April 2018, 2 purported stockholders filed separate stockholder derivative complaints in the United States District Court for the District of Maryland. These were brought against Kevin Plank (the Company’s Chairman and Chief Executive Officer) and certain other members of the Company’s Board of Directors and name the Company as a nominal defendant. The complaints make allegations related to the Company’s purchase of certain parcels of land from entities controlled by Mr. Plank (through Sagamore Development Company, LLC (“Sagamore”)), as well as other related party transactions. 6.Sagamore purchased these 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 a purchase 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 20, 2019, these cases were consolidated under the caption In re Under Armour, Inc. Shareholder Derivative Litigation and a lead plaintiff was appointed by the court. On May 1, 2019, the lead plaintiff filed a consolidated derivative complaint asserting that Mr. Plank and the director defendants breached their fiduciary duties in connection with the purchase of the parcels and other related party transactions and that Sagamore aided and abetted the alleged breaches of fiduciary duty by the other defendants in connection with Sagamore’s alleged role in the sale of the parcels to the Company. The consolidated complaint also asserts an unjust enrichment claim against Mr. Plank and Sagamore. It seeks damages on behalf of the Company and certain corporate governance related actions. The Company and the defendants filed a motion to dismiss the consolidated complaint on July 2, 2019, which is currently pending.
In June and July 2018, 3 additional purported stockholder derivative complaints were filed. Two of the 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), and those cases were consolidated on October 19, 2018 under the caption Kenney v. Plank, et. al. The other complaint was filed in the United States District Court for the District of Maryland (in a case captioned Andersen v. Plank et al. (filed July 23, 2018)). The operative complaints in these cases name Mr. Plank, certain other members of the Company’s Board of Directors and certain former Company executives as defendants, and name the Company as a nominal defendant. The operative complaints include allegations similar to those in the In re Under Armour Securities Litigation matter discussed above that challenges, 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 operative complaints in each of these cases assert breach of fiduciary duty and unjust enrichment claims against the individual defendants. The operative complaint in the Kenney matter also makes allegations similar to those in the consolidated complaint in the In re Under Armour, Inc. Shareholder Derivative Litigation matter discussed above regarding the Company’s purchase of parcels from entities controlled by Mr. Plank through Sagamore and asserts a claim of corporate waste against the individual defendants. These complaints seek similar remedies to the remedies sought in the In re Under Armour, Inc. Shareholder Derivative Litigation complaint.
The Andersen action was stayed between December 2018 and August 2019 pursuant to a court order. In September 2019, pursuant to an agreement between the parties, the court in the Andersen action entered an order staying that case pending the resolution of the Appeal. 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 In re Under Armour Securities Litigation and the In re Under Armour, Inc. Shareholder Derivative Litigation matters.
Prior to the filing of the derivative complaints discussed above, each of the purported stockholders had sent the Company 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 each of these purported stockholders of that determination. The Company believes that the claims asserted in the derivative complaints 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.
Data Incident
In 2018, an unauthorized third party acquired data associated with the Company’s Connected Fitness users’ accounts for the Company’s MyFitnessPal application and website. Consumer class action lawsuits in connection with this incident remain pending, and the Company has received inquiries regarding the incident from certain government regulators and agencies. The Company does not currently consider these matters to be material and believes its insurance coverage will provide coverage should any significant expense arise.
7. 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 on a recurring basis are set forth in the table below:
| | | | | September 30, 2017 | | December 31, 2016 | | September 30, 2016 | | September 30, 2019 | | | December 31, 2018 | | | September 30, 2018 | |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | 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 | | Level 1 | | Level 2 | | Level 3 |
| Derivative foreign currency contracts (see Note 8) | |
|
| | (7,754 | ) | |
|
| | — |
| | 15,238 |
| | — |
| | — |
| | 1,577 |
| | — |
| |
| Interest rate swap contracts (see Note 8) | | — |
| | 156 |
| | — |
| | — |
| | (420 | ) | | — |
| | — |
| | 3,953 |
| | — |
| |
| Derivative foreign currency contracts (see Note 9) | | Derivative foreign currency contracts (see Note 9) | | $ | — | | | $ | 18,695 | | | $ | — | | | $ | — | | | $ | 19,531 | | | $ | — | | | $ | — | | | $ | 11,592 | | | $ | — | |
| Interest rate swap contracts (see Note 9) | | Interest rate swap contracts (see Note 9) | | — | | | — | | | — | | | — | | | 1,567 | | | — | | | — | | | 2,577 | | | — | |
| TOLI policies held by the Rabbi Trust | | — |
| | 5,539 |
| | — |
| | — |
| | 4,880 |
| | — |
| | — |
| | 4,819 |
| | — |
| TOLI policies held by the Rabbi Trust | | — | | | 6,139 | | | — | | | — | | | 5,328 | | | — | | | — | | | 6,026 | | | — | |
| Deferred Compensation Plan obligations | | — |
| | (9,301 | ) | | — |
| | — |
| | (7,023 | ) | | — |
| | — |
| | (6,486 | ) | | — |
| Deferred Compensation Plan obligations | | — | | | (10,269) | | | — | | | — | | | (6,958) | | | — | | | — | | | (8,339) | | | — | |
Fair values of the financial assets and liabilities listed above are determined using inputs that use as their basis readily observable market data that are actively quoted and are validated through external sources, including third-party pricing services and brokers. The foreign currency contracts represent unrealized 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 isare based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are initially made in the same funds and purchased in substantially the same amounts as the selected investments of participants in the Under Armour, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), which represent the underlying liabilities to participants in the Deferred Compensation Plan. Liabilities under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments.
As of September 30, 2017,2019, December 31, 2018, and September 30, 2018, the fair value of the Company's Senior Notes was $557.3$579.7 million, $500.1 million and as of September 30, 2016, the carrying value approximated the fair value.$529.7 million, respectively. The carrying value of the Company's other long term debt approximated its fair value as of September 30, 20172019, December 31, 2018 and 2016.September 30, 2018. 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 hashave been reduced to fair value when impaired (see Note 3).impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
8. Stock Based Compensation
Performance-Based Equity Compensation
The Company grants a combination of time-based and performance-based restricted stock units and stock options as part of its incentive compensation. Certain senior executives are eligible to receive performance-based awards. During the nine months ended September 30, 2017, 1.82019, 0.6 million performance-based restricted stock units and 0.50.2 million performance-based stock options for shares of ourthe Company's Class C common stock were awarded under the Company's SecondThird Amended and Restated 2005 Omnibus Long-Term Incentive Plan, as amended. The performance-based restricted stock units and stock options have weighted average grant date fair values of $19.05$19.39 and $8.17, respectively, and have vesting$8.70, respectively. Vesting conditions are tied to the achievement of certain combined revenue and operating income targets for 20172019 and 2018. 2020, with possible achievement levels ranging from 25-200% of the target level based on performance (with no restricted stock units or stock options vesting if none of the performance targets are achieved). Upon the achievement of the targets, one halfthird of the restricted stock units and stock options will vest each in February 20192021, 2022 and February 2020.
If certain lower levels of combined annual revenue and operating income for 2017 and 2018 are achieved, fewer or no restricted stock units or options will vest and the remaining restricted stock units and options will be forfeited.2023. The Company deemed the achievement of certain revenue and operating income targets for 20172019 and 20182020 probable during the nine months ended September 30, 2017.2019. The Company assesses the probability of the achievement of the remaining revenue and operating income targets at the end of each reporting period. If it becomes probableperiod and based on that any remaining performance targets related to these performance-based restricted stock units and options will be achieved, aassessment cumulative adjustment willadjustments may be recorded in future periods.
9. Risk Management and Derivatives
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 if ratable stock-based compensation expense had been recorded sincehedging 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 grant date. Additional stock based compensation of up to $4.2 million would have been recorded during the nine months ended September 30, 2017, for these performance-based restricted stock units and options had the achievementeffectiveness of the remaining revenuehedging relationships.
The Company's foreign exchange risk management program consists of designated cash flow hedges and operating income targets been deemed probable.
During 2016, the Company granted performance-based restricted stock units and options with vesting conditions tied to the achievement of certain combined annual operating income targets for 2016 and 2017.undesignated hedges. As of September 30, 2017,2019, the Company deemshas hedge instruments, primarily for U.S. Dollar/Chinese Renminbi, British Pound/U.S. Dollar, U.S. Dollar/Canadian Dollar, U.S. Dollar/Mexican Peso, Euro/U.S. Dollar, and U.S. Dollar/Korean Won currency pairs. All derivatives are recognized on the achievementunaudited consolidated balance sheets at fair value and classified based on the instrument’s maturity date.
The following table presents the fair values of derivative instruments within the unaudited consolidated balance sheets. Refer to Note 7 for a discussion of the fair value measurements.
| | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Balance Sheet Classification | September 30, 2019 | | December 31, 2018 | | September 30, 2018 | | | | |
| Derivatives designated as hedging instruments under ASC 815 | | | | | | | | | | |
| Foreign currency contracts | Other current assets | | $ | 18,866 | | | $ | 19,731 | | | $ | 13,532 | | | | | |
| Foreign currency contracts | Other long term assets | | 1,220 | | | — | | | 318 | | | | | |
| Interest rate swap contracts | Other long term assets | | — | | | 1,567 | | | 2,577 | | | | | |
| Total derivative assets designated as hedging instruments | | $ | 20,086 | | | $ | 21,298 | | | $ | 16,427 | | | | | |
| | | | | | | | | | |
| Foreign currency contracts | Other current liabilities | | $ | 1,260 | | | $ | 228 | | | $ | 1,709 | | | | | |
| Foreign currency contracts | Other long term liabilities | | — | | | — | | | — | | | | | |
| Total derivative liabilities designated as hedging instruments | | $ | 1,260 | | | $ | 228 | | | $ | 1,709 | | | | | |
| | | | | | | | | | |
| Derivatives not designated as hedging instruments under ASC 815 | | | | | | | | | | |
| Foreign currency contracts | Other current assets | | $ | 1,393 | | | $ | 1,097 | | | $ | 773 | | | | | |
| Total derivative assets not designated as hedging instruments | | $ | 1,393 | | | $ | 1,097 | | | $ | 773 | | | | | |
| | | | | | | | | | |
| Foreign currency contracts | Other current liabilities | | $ | 2,794 | | | $ | 2,307 | | | $ | 3,141 | | | | | |
| Total derivative liabilities not designated as hedging instruments | | $ | 2,794 | | | $ | 2,307 | | | $ | 3,141 | | | | | |
The following table presents the amounts in the unaudited consolidated statements of operations in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these operatingline items.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | | | | | Nine months ended September 30, | | | | |
| 2019 | | | 2018 | | | 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 | | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity |
| Net revenues | $ | 1,429,456 | | $ | 6,125 | | $ | 1,442,976 | $ | (46) | | | $ | 3,825,907 | | $ | 14,337 | | $ | 3,803,205 | $ | (3,743) | |
| Cost of goods sold | 739,558 | | 1,317 | | | 777,769 | | 321 | | | 2,036,901 | | 3,525 | | | 2,087,961 | | (2,208) | |
| Interest expense, net | (5,655) | | (9) | | | (9,151) | | 133 | | | (15,881) | | 1,607 | | | (26,266) | | 191 | |
| Other expense, net | (429) | | 44 | | | (4,294) | | 705 | | | (2,224) | | 836 | | | (9,475) | | 845 | |
The following tables present the amounts affecting the unaudited statements of comprehensive income targets improbable. As such, no expense for(loss).
| | | | | | | | | | | | | | |
| (In thousands) | Balance as of
June 30, 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
September 30, 2019 |
| Derivatives designated as cash flow hedges | | | | |
| Foreign currency contracts | 11,595 | | 17,378 | | 7,495 | | 21,478 | |
| Interest rate swaps | (595) | | — | | (9) | | (586) | |
| Total designated as cash flow hedges | $ | 11,000 | | $ | 17,378 | | $ | 7,486 | | $ | 20,892 | |
| | | | | | | | | | | | | | |
| (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 September 30, 2019 |
| Derivatives designated as cash flow hedges | | | | |
| Foreign currency contracts | 21,908 | | 18,277 | | 18,707 | | 21,478 | |
| Interest rate swaps | 954 | | 67 | | 1,607 | | (586) | |
| Total designated as cash flow hedges | $ | 22,862 | | $ | 18,344 | | $ | 20,314 | | $ | 20,892 | |
| | | | | | | | | | | | | | |
| (In thousands) | Balance as of
June 30, 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
September 30, 2018 |
| Derivatives designated as cash flow hedges | | | | |
| Foreign currency contracts | 13,755 | | (1,580) | | 966 | | 11,209 | |
| Interest rate swaps | 1,799 | | 23 | | (132) | | 1,954 | |
| Total designated as cash flow hedges | $ | 15,554 | | $ | (1,557) | | $ | 834 | | $ | 13,163 | |
| | | | | | | | | | | | | | |
| (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
September 30, 2018 |
| Derivatives designated as cash flow hedges | | | | |
| Foreign currency contracts | (8,312) | | 14,401 | | (5,120) | | 11,209 | |
| Interest rate swaps | 438 | | 1,442 | | (75) | | 1,954 | |
| Total designated as cash flow hedges | $ | (7,874) | | $ | 15,843 | | $ | (5,195) | | $ | 13,163 | |
The following table presents the amounts in the unaudited consolidated statements of operations in which the effects of undesignated derivative instruments are recorded and the effects of fair value hedge activity on these awards has been recorded during the three and nine months ended September 30, 2017.line items.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | | | | | Nine months ended September 30, | | | | |
| 2019 | | | 2018 | | | 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 | | Total | Amount of Gain (Loss) on Fair Value Hedge Activity |
| Other expense, net | $ | (429) | | $ | (474) | | | $ | (4,294) | | $ | (5,613) | | | $ | (2,224) | | $ | (2,629) | | | $ | (9,475) | | $ | (12,066) | |
8. Risk Management and DerivativesCash Flow Hedges
Foreign Currency Risk Management
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions generated by its international subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by intercompany transactions 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 September 30, 2017,2019, the aggregate notional value of the Company's outstanding foreign currency contractscash flow hedges was $338.6$568.3 million, which was comprised of Canadian Dollar/U.S. Dollar, Euro/U.S. Dollar, Yen/Euro, Mexican Peso/Euro and Pound Sterling/Euro currency pairs with contract maturities ranging from one to fourteeneighteen months. A portion of the Company's foreign currency contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings.
The Company also enters into foreign currency contracts designated as cash flow hedges. For foreign currency contracts designated as cash flow hedges, changes in fair value, excluding any ineffective portion, are recorded in other comprehensive income until net income is affected by the variability in cash flows of the hedged transaction. The effective portion is generally released to net income after the maturity of the related derivative and is classified in the same manner as the underlying exposure.
During the three and nine months ended September 30, 2017, the Company reclassified $0.1 million and $1.8 million from other comprehensive income to cost of goods sold related to foreign currency contracts designated as cash flow hedges, respectively. The fair values of the Company's foreign currency contracts were a liability of $7.8 million as of September 30, 2017, and were included in accrued expenses on the consolidated balance sheet. The fair values of the Company's foreign currency contracts were assets of $15.2 million and $1.6 million as of December 31, 2016 and September 30, 2016, respectively, and were included in prepaid expenses and other current assets on the consolidated balance sheet. Refer to Note 6 for a discussion of the fair value measurements. Included in other expense, net were the following amounts related to changes in foreign currency exchange rates and derivative foreign currency contracts:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Unrealized foreign currency exchange rate gains (losses) | $ | 1,035 |
| | $ | 985 |
| | $ | 30,429 |
| | $ | 4,846 |
|
| Realized foreign currency exchange rate gains (losses) | 3,221 |
| | (2,635 | ) | | 865 |
| | (3,094 | ) |
| Unrealized derivative gains (losses) | 388 |
| | 516 |
| | (838 | ) | | (401 | ) |
| Realized derivative gains (losses) | (4,182 | ) | | 426 |
| | (26,972 | ) | | (2,415 | ) |
Interest Rate Risk Management
In order to maintain liquidity and fund business operations, the Company 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 term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations. The Company utilizes interest rate swap contracts to convert a portion of variable rate debt to fixed rate debt. The contracts pay fixed and receive variable rates of interest. The interest rate swap contracts are accounted for as cash flow hedges. Accordingly,Refer to Note 5 for a discussion of long term debt. As of September 30, 2019, the effective portion of theCompany had no outstanding interest rate swap contracts.
For foreign currency contracts designated as cash flow hedges, changes in their fair value, excluding any ineffective portion, are recorded in other comprehensive income and reclassified into interest expense overuntil net income is affected by the lifevariability in cash flows of the hedged transaction. The effective portion is generally released to net income (loss) after the maturity of the related derivative and is classified in the same manner as the underlying debt obligation. Referexposure.
Undesignated Derivative Instruments
The Company may elect to Note 4 forenter into foreign exchange forward contracts to mitigate the change in fair value of specific assets and liabilities on the unaudited consolidated balance sheets. These undesignated instruments are recorded at fair value as a discussion of long term debt.
derivative asset or liability on the unaudited 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 September 30, 2017,2019, the total notional value of the Company's outstanding interest rate swap contractsundesignated derivative instruments was $140.0$454.0 million. During the three months ended September 30, 2017 and 2016, the Company recorded a $0.2 million and $0.5 million increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. During the nine months ended September 30, 2017 and 2016, the Company recorded a $0.8 million and $1.6 million increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. The fair values of the interest rate swap contracts were assets of $0.2 million and $4.0 million as of September 30, 2017 and 2016, respectively, and were included in other long term assets on the consolidated balance sheet. The fair value of the interest rate swap contracts was a liability of $0.4 million as of December 31, 2016, and was included in other long term liabilities on the consolidated balance sheet.
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.
9.10. Provision for Income Taxes
Provision for Income Taxes
The effective rates for income taxes decreased $81.6 million to a benefit of $1.3 million duringwere 22.1% and 29.3% for the ninethree months ended September 30, 2017 from $80.3 million during the same period in 2016. For the nine months ended September 30, 2017, the Company's effective tax rate was (3.5%) compared to 34.3% for the same period in 2016.2019 and 2018, respectively. The effective tax rate for the ninethree months ended September 30, 20172019 was lower than the effective tax rate for the ninethree months ended September 30, 20162018 primarily due to challenged resultschanges in North America creating a higherthe proportion of international profitsearnings taxed in 2017,the United States as a result of the 2018 Restructuring Plan, partially offset by non-deductible goodwill impairment charges anddiscrete items as a percentage of the recordingpre-tax results in each period.
Valuation allowances of $13.2 million were recorded discretely againstAllowance
The Company evaluates on a quarterly basis whether the deferred tax assets asare realizable which requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of December 31, 2016 for certain U.S. state jurisdictions. Additionally,future operating performance. 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 were recordedare established against current yearthe Company's deferred tax assets, which increase income tax expense in certainthe period when such a determination is made.
As noted in the Company's Annual Report on Form 10-K, a significant portion of our deferred tax assets relate to U.S. federal and state taxing jurisdictions. TheseRealization of these deferred tax assets is dependent on future U.S. pre-tax earnings. Due to the Company's challenged U.S. results in 2017 and 2018 the Company incurred significant pre-tax losses in these jurisdictions. The Company continues to believe, as of September 30, 2019, that the weight of the positive evidence outweighs the negative evidence, regarding the realization of the majority of the net deferred tax assets related to U.S. federal and state taxing jurisdictions. However, as of September 30, 2019 and consistent with prior periods, valuation allowances werehave been recorded due to lower than expected results in the third quarter of 2017 and a significantly reduced outlook for the remainder of the year.
The Company files income tax returns in theagainst select U.S. federal jurisdiction and various stateState and foreign jurisdictions which are regularly subject to examination by tax authorities. Based on the status of current examinations in various taxing jurisdictions, management believes it is reasonably possible that in the next 12 months the amount of the total liability for unrecognized income tax benefits and interest could decrease by up to $16 million.net operating losses.
10.11. Earnings per Share
The following represents a reconciliation from basic earningsincome (loss) per share to diluted earningsincome (loss) per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | | | |
| (In thousands, except per share amounts) | 2019 | | 2018 | | 2019 | | 2018 | | | | |
| Numerator | | | | | | | | | | | |
| Net income (loss) | $ | 102,315 | | | $ | 75,266 | | | $ | 107,443 | | | $ | (50,520) | | | | | |
| Denominator | | | | | | | | | | | |
| Weighted average common shares outstanding Class A, B and C | 451,385 | | | 447,070 | | | 450,739 | | | 444,931 | | | | | |
| Effect of dilutive securities Class A, B, and C | 3,310 | | | 3,965 | | | 3,308 | | | — | | | | | |
| Weighted average common shares and dilutive securities outstanding Class A, B, and C | 454,695 | | | 451,035 | | | 454,047 | | | 444,931 | | | | | |
| | | | | | | | | | | |
| Basic net income (loss) per share of Class A, B and C common stock | $ | 0.23 | | | $ | 0.17 | | | $ | 0.24 | | | $ | (0.11) | | | | | |
| Diluted net income (loss) per share of Class A, B and C common stock | $ | 0.23 | | | $ | 0.17 | | | $ | 0.24 | | | $ | (0.11) | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands, except per share amounts) | 2017 | | 2016 | | 2017 | | 2016 |
| Numerator | | | | | | | |
| Net income | $ | 54,242 |
| | $ | 128,225 |
| | $ | 39,660 |
| | $ | 153,748 |
|
| Adjustment payment to Class C capital stockholders | — |
| | — |
| | — |
| | 59,000 |
|
| Net income available to all stockholders | $ | 54,242 |
| | $ | 128,225 |
| | $ | 39,660 |
| | $ | 94,748 |
|
| Denominator | | | | | | | |
| Weighted average common shares outstanding Class A and B | 219,491 |
| | 218,074 |
| | 219,125 |
| | 217,535 |
|
| Effect of dilutive securities Class A and B | 3,357 |
| | 4,041 |
| | 3,746 |
| | 4,174 |
|
| Weighted average common shares and dilutive securities outstanding Class A and B | 222,848 |
| | 222,115 |
| | 222,871 |
| | 221,709 |
|
| | | | | | | | |
| Weighted average common shares outstanding Class C | 221,784 |
| | 219,756 |
| | 221,235 |
| | 218,147 |
|
| Effect of dilutive securities Class C | 3,807 |
| | 3,982 |
| | 4,155 |
| | 4,154 |
|
| Weighted average common shares and dilutive securities outstanding Class C | 225,591 |
| | 223,738 |
| | 225,390 |
| | 222,301 |
|
| | | | | | | | |
| Basic net income per share of Class A and B common stock | $ | 0.12 |
| | $ | 0.29 |
| | $ | 0.09 |
| | $ | 0.22 |
|
| Basic net income per share of Class C common stock | $ | 0.12 |
| | $ | 0.29 |
| | $ | 0.09 |
| | $ | 0.49 |
|
| Diluted net income per share of Class A and B common stock | $ | 0.12 |
| | $ | 0.29 |
| | $ | 0.09 |
| | $ | 0.21 |
|
| Diluted net income per share of Class C common stock | $ | 0.12 |
| | $ | 0.29 |
| | $ | 0.09 |
| | $ | 0.48 |
|
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options and restricted stock units representing 233.8 thousand0.6 million and 83.7 thousand1.3 million shares of Class A and C common stock outstanding for the three months ended September 30, 20172019 and 2016,2018, respectively, and 1.9 million for the nine months ended September 30, 2019, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Stock options and restricted stock units representing 4.0 million and 1.1 million shares of Class C common stock outstandingDue to the Company being in a net loss position for the threenine months ended September 30, 2017 and 2016, respectively,2018, there were excluded from0 warrants, stock options, or restricted stock units included in the computation of diluted earnings per share, because their effect would have been anti-dilutive. Stock options and restricted stock units representing 272.3 thousand and 86.9 thousand shares of Class A common stock outstanding for the nine months ended September 30, 2017 and 2016, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Stock options and restricted stock units representing 4.1 million and 0.4 million shares of Class C common
stock outstanding for the nine months ended September 30, 2017 and 2016, respectively, were excluded from the computation of diluted earnings per share becauseas their effect would have been anti-dilutive.
11.12. Segment Data and Related Information
The Company’s operating segments are based on how the Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company's principal business by geographic region based on the Company’s strategy to become a global brand. These geographic regions include North America, Latin America, Europe, the Middle East and Africa (“EMEA”), 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.segment. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM.
Effective January 1, 2019, the Company changed the way management internally analyzes the business and excludes certain corporate costs from its segment profitability measures. The Company reports these costs within Corporate Other, which is designed to provide increased transparency and comparability of the Company's
operating segments performance. Prior year amounts have been recast to conform to the 2019 presentation. These changes have no impact on previously reported consolidated balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, or cash flows.
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.
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
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | | | |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | | | | |
| Net revenues | | | | | | | | | | | |
| North America | $ | 1,015,920 | | | $ | 1,059,535 | | | $ | 2,675,389 | | | $ | 2,770,463 | | | | | |
| EMEA | 160,981 | | | 147,640 | | | 440,405 | | | 414,170 | | | | | |
| Asia-Pacific | 154,898 | | | 149,388 | | | 453,296 | | | 390,647 | | | | | |
| Latin America | 52,186 | | | 54,299 | | | 141,095 | | | 141,570 | | | | | |
| Connected Fitness | 39,346 | | | 32,160 | | | 101,385 | | | 90,098 | | | | | |
| Corporate Other (1) | 6,125 | | | (46) | | | 14,337 | | | (3,743) | | | | | |
| Total net revenues | $ | 1,429,456 | | | $ | 1,442,976 | | | $ | 3,825,907 | | | $ | 3,803,205 | | | | | |
(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 outsideCompany's central foreign exchange risk management program.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | | | |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | | | | |
| Operating income (loss) | | | | | | | | | | | |
| North America | $ | 237,229 | | | $ | 253,706 | | | $ | 536,700 | | | $ | 534,421 | | | | | |
| EMEA | 21,989 | | | 16,726 | | | 44,700 | | | 17,935 | | | | | |
| Asia-Pacific | 34,666 | | | 36,579 | | | 74,116 | | | 82,092 | | | | | |
| Latin America | 233 | | | (3,772) | | | (4,017) | | | (10,339) | | | | | |
| Connected Fitness | 7,023 | | | 2,132 | | | 8,103 | | | 7,254 | | | | | |
| Corporate Other | (162,220) | | | (186,405) | | | (496,905) | | | (645,932) | | | | | |
| Total operating income (loss) | 138,920 | | | 118,966 | | | 162,697 | | | (14,569) | | | | | |
| Interest expense, net | (5,655) | | | (9,151) | | | (15,881) | | | (26,266) | | | | | |
| Other expense, net | (429) | | | (4,294) | | | (2,224) | | | (9,475) | | | | | |
| Income (loss) before income taxes | $ | 132,836 | | | $ | 105,521 | | | $ | 144,592 | | | $ | (50,310) | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Net revenues | | | | | | | |
| North America | $ | 1,077,088 |
| | $ | 1,225,188 |
| | $ | 2,778,165 |
| | $ | 2,932,915 |
|
| EMEA | 127,932 |
| | 105,099 |
| | 334,683 |
| | 237,559 |
|
| Asia-Pacific | 130,320 |
| | 85,810 |
| | 309,712 |
| | 188,985 |
|
| Latin America | 46,887 |
| | 35,295 |
| | 123,342 |
| | 99,170 |
|
| Connected Fitness | 23,388 |
| | 20,181 |
| | 65,290 |
| | 62,179 |
|
| Intersegment eliminations | — |
| | — |
| | — |
| | (750 | ) |
| Total net revenues | $ | 1,405,615 |
| | $ | 1,471,573 |
| | $ | 3,611,192 |
| | $ | 3,520,058 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| Nine Months Ended September 30, |
| (In thousands) | 2017 |
| 2016 |
| 2017 |
| 2016 |
| Operating income |
|
|
|
|
|
|
|
| North America | $ | 65,827 |
|
| $ | 182,840 |
|
| $ | 64,124 |
|
| $ | 251,084 |
|
| EMEA | 16,977 |
|
| 8,383 |
|
| 13,990 |
|
| 8,348 |
|
| Asia-Pacific | 34,173 |
|
| 27,151 |
|
| 69,050 |
|
| 54,399 |
|
| Latin America | (10,223 | ) |
| (10,550 | ) |
| (26,175 | ) |
| (27,751 | ) |
| Connected Fitness | (44,574 | ) |
| (8,514 | ) |
| (56,058 | ) |
| (32,509 | ) |
| Total operating income | 62,180 |
|
| 199,310 |
|
| 64,931 |
|
| 253,571 |
|
| Interest expense, net | (9,575 | ) |
| (8,189 | ) |
| (25,237 | ) |
| (18,476 | ) |
| Other expense, net | (1,069 | ) |
| (772 | ) |
| (1,383 | ) |
| (1,025 | ) |
| Income before income taxes | $ | 51,536 |
|
| $ | 190,349 |
|
| $ | 38,311 |
|
| $ | 234,070 |
|
The operating income (loss) information for Corporate Other presented above includes the impact of all restructuring, impairment and impairmentrestructuring related charges related to the Company's 2018 restructuring plan. Charges incurred and expected to be incurred by segment in connection with the restructuring planThese unallocated charges are as follows:
| | | | | | | | | | | | | | | |
| (In thousands) | Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 | | | | |
| Unallocated restructuring, impairment and restructuring related charges | | | | | | | |
| North America related | $ | 13,056 | | | $ | 99,269 | | | | | |
| EMEA related | 403 | | | 11,841 | | | | | |
| Asia-Pacific related | 20 | | | 20 | | | | | |
| Latin America related | 5,404 | | | 24,263 | | | | | |
| Connected Fitness related | 178 | | | 178 | | | | | |
| Corporate Other related | 5,227 | | | 18,450 | | | | | |
| Total unallocated restructuring, impairment and restructuring related charges | $ | 24,288 | | | $ | 154,021 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Costs Incurred | Estimated Costs to be Incurred |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended December 31, | | Total | |
| (In thousands) | 2017 (1) | | 2017 (1) | | 2017 (1) | | 2017 | |
| Costs recorded in restructuring and impairment charges: | | | | | | | | |
| North America | $ | 30,965 |
| | $ | 33,563 |
| | $ | 49,000 |
| | $ | 82,563 |
| |
| EMEA | 184 |
| | 184 |
| | 8,000 |
| | 8,184 |
| |
| Asia-Pacific | — |
| | — |
| | — |
| | — |
| |
| Latin America | 6,039 |
| | 6,540 |
| | — |
| | 6,540 |
| |
| Connected Fitness | 47,810 |
| | 47,810 |
| | — |
| | 47,810 |
| |
| Total costs recorded in restructuring and impairment charges | $ | 84,998 |
| | $ | 88,097 |
| | $ | 57,000 |
| | $ | 145,097 |
| |
(1) This table excludes additional non-cashThere were no restructuring charges of $3.6 million forincurred during the three and nine months ended September 30, 2017 associated with the reduction of inventory outside of current liquidation channels in line with the restructuring plan.2019.
Net revenues by product category are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | | | |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | | | | |
| Apparel | $ | 985,623 | | | $ | 978,457 | | | $ | 2,499,989 | | | $ | 2,495,723 | | | | | |
| Footwear | 250,596 | | | 284,856 | | | 827,223 | | | 828,001 | | | | | |
| Accessories | 118,164 | | | 116,186 | | | 306,406 | | | 314,250 | | | | | |
| Net Sales | 1,354,383 | | | 1,379,499 | | | 3,633,618 | | | 3,637,974 | | | | | |
| License revenues | 29,602 | | | 31,363 | | | 76,567 | | | 78,876 | | | | | |
| Connected Fitness | 39,346 | | | 32,160 | | | 101,385 | | | 90,098 | | | | | |
| Corporate Other | 6,125 | | | (46) | | | 14,337 | | | (3,743) | | | | | |
| Total net revenues | $ | 1,429,456 | | | $ | 1,442,976 | | | $ | 3,825,907 | | | $ | 3,803,205 | | | | | |
Net revenues by distribution channel are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | | | |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 | | | | |
| Wholesale | $ | 891,709 | | | $ | 914,225 | | | $ | 2,417,028 | | | $ | 2,406,922 | | | | | |
| Direct to Consumer | 462,674 | | | 465,274 | | | 1,216,590 | | | 1,231,052 | | | | | |
| Net Sales | 1,354,383 | | | 1,379,499 | | | 3,633,618 | | | 3,637,974 | | | | | |
| License revenues | 29,602 | | | 31,363 | | | 76,567 | | | 78,876 | | | | | |
| Connected Fitness | 39,346 | | | 32,160 | | | 101,385 | | | 90,098 | | | | | |
| Corporate Other | 6,125 | | | (46) | | | 14,337 | | | (3,743) | | | | | |
| Total net revenues | $ | 1,429,456 | | | $ | 1,442,976 | | | $ | 3,825,907 | | | $ | 3,803,205 | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Net Revenues | | | | | | | |
| Apparel | $ | 939,364 |
| | $ | 1,021,185 |
| | $ | 2,335,454 |
| | $ | 2,300,596 |
|
| Footwear | 285,052 |
| | 278,891 |
| | 791,637 |
| | 785,843 |
|
| Accessories | 123,487 |
| | 121,832 |
| | 335,172 |
| | 302,267 |
|
| Total net sales | 1,347,903 |
| | 1,421,908 |
| | 3,462,263 |
| | 3,388,706 |
|
| License revenues | 34,324 |
| | 29,484 |
| | 83,639 |
| | 69,923 |
|
| Connected Fitness | 23,388 |
| | 20,181 |
| | 65,290 |
| | 62,179 |
|
| Intersegment eliminations | — |
| | — |
| | — |
| | (750 | ) |
| Total net revenues | $ | 1,405,615 |
| | $ | 1,471,573 |
| | $ | 3,611,192 |
| | $ | 3,520,058 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Some of the statements contained in this Form 10-Q constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, our anticipated charges and restructuring costs and the timing of these measures, the development and introduction of new products, the implementation of our marketing and branding strategies, the impact of our investment in our licensee on our results of operations and future benefits and opportunities from acquisitions and other significant investments. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “outlook,” “potential” or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Form 10-Q reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by these forward-looking statements, including, but not limited to, those factors described in our Annual Report on Form 10-K for the year ended December 31, 20162018 filed with the Securities and Exchange Commission (“SEC”) (our “2016“2018 Form 10-K”) or in this Form 10-Q under “Risk Factors”, if included herein, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These factors include without limitation:
•changes in general economic or market conditions that could affect overall consumer spending or our industry;
•changes to the financial health of our customers;
•our ability to successfully execute our long-term strategies;
•our ability to successfully execute any restructuring planplans and realize its expected benefits;
•our ability to effectively drive operational efficiency in our business;
any disruptions, delays or deficiencies in the design or implementation of our new global operating and financial reporting information technology system;
•our ability to effectively manage the increasingly complex operations of our growth and a more complex global business;
•our ability to comply with existing trade and other regulations, and the potential impact of new trade, tariff and tax regulations on our profitability;
our ability to successfully manage or realize expected results from acquisitions and other significant investments or capital expenditures;
•our ability to effectively develop and launch new, innovative and updated products;
fluctuations in the costs of our products;
•our ability to accurately forecast consumer demand for our products and manage our inventory in response to changing demands;
•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;
•the impact of the performance of our equity method investment on our results of operations;
•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, including risks related to the implementation of our new global operating and financial reporting information technology system;technology;
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 effectively market and maintain a positive brand image;
•risks related to data security or privacy breaches;breaches, including the 2018 data security issue related to our Connected Fitness business;
•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-Q reflect our views and assumptions only as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
Overview
We are a leading developer, marketer and distributor of branded athletic 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 one of the world's largest digital healthdigitally connected fitness and fitness communitywellness communities and our strategy is focused on engaging with these consumers and increasing awareness and sales of our products. We plan to grow this community by developing innovative applications, services and other digital solutions to impact how athletes and fitness-minded individuals train, perform and live.
Our net revenues grew to $4,825.3$5,193.2 million in 20162018 from $1,834.9$3,084.4 million in 2012.2014. We believe that our growth in net revenues has been driven by increasing consumera growing interest in ourperformance products and the strength of the Under Armour brand in the market place.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 and engaging with consumers through our Connected Fitness business.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.
Financial highlights for the three months ended September 30, 20172019 as compared to the prior year period include:
•Net revenues decreased 4.5%0.9%.
•Wholesale revenue decreased 13.2%2.5% and Direct to Consumerdirect-to-consumer revenue increased 14.6%decreased 0.6%.
•Apparel revenue decreased8.0%. Footwear and accessories revenues grew 2.2%revenue increased0.7% and 1.4%1.7%, respectively.
respectively, and footwear revenue decreased 12.0%.•Revenue in our North America segment decreased 12.1%. Revenue in our Asia-Pacific, EMEA and Latin America segments grew 51.9%decreased 4.1% and 3.9%, 21.7%respectively, while revenue in our Asia-Pacific and 32.8%EMEA segments increased 3.7% and 9.0%, respectively.
•Gross margin increased 220 basis points, including restructuring related charges in the prior year.
•Selling, general and administrative expense decreased 0.2%increased 4.4%.
Gross margin decreased 160 basis points.•Restructuring and impairment charges related to the 2018 restructuring plan were $18.6 million in the prior year.
On July 27, Segment Presentation
Effective January 1, 2019, we changed the way we internally analyze the business and now exclude certain corporate costs from our segment profitability measures. We now report these costs within Corporate Other, which is designed to provide increased transparency and comparability of the performance of our operating segments. Prior year amounts have been recast to conform to the 2019 presentation. These changes had no impact on previously reported consolidated balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, or cash flows.
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 restructuring related charges; and certain foreign currency hedge gains and losses.
Marketing
In connection with the Corporate Other presentation discussed above, effective January 1, 2019, we changed the way we internally analyze marketing. Personnel costs previously included in marketing expense are now included in other expense and digital advertising and placement services previously included in other expense are now included in marketing expense. We believe these changes provide management with increased transparency of our demand creation investments. Certain prior year amounts have been recast to conform to the 2019 presentation. We do not expect these changes to have a material impact on marketing amounts.
2017 and 2018 Restructuring
As previously announced, in both 2017 and 2018, our Board of Directors approved a restructuring planplans (the “restructuring plan”"2017 restructuring plan" and the "2018 restructuring plan") designed to more closely align our financial resources with ourthe critical priorities of the business. Our original expectation was to incur estimated pre-taxbusiness and optimize operations. All restructuring and related charges of approximately $110.0 to $130.0 million forunder the year endedplans were incurred by December 31, 2017. In2018.
There were no restructuring charges incurred during the third quarter of 2017, wethree and nine months ended September 30, 2019. We recognized approximately $59.9$24.3 million and $154.0 million of pre-tax charges in connection with thisthe 2018 restructuring plan which included $31.2 millionfor the three and nine months ended September 30, 2018, respectively.
Other Matters
On November 4, 2019, we disclosed that we have been responding to requests for documents and information from the SEC and the U.S. Department of asset impairments and $28.7 millionJustice regarding certain of restructuring related charges including employee related severance, contract terminations and other restructuring related costs. In addition to these charges, we also recognized restructuring related goodwill impairment charges of approximately $28.6 million for our Connected Fitness business which was not included our original range estimate. Inclusive of the goodwill impairment, we now expect to incur total pre-tax restructuringaccounting practices and related chargesdisclosures, beginning with submissions to the SEC in July 2017. In the course of approximately $140.0cooperating with these requests, both management and the Board of Directors have reviewed our accounting practices and related disclosures and we continue to $150.0 million for the year ending December 31, 2017.believe our accounting practices and related disclosures were appropriate.
General
Net revenues comprise net sales, license revenues and Connected Fitness revenues. Net sales comprise sales from our primary product categories, which are apparel, footwear and accessories. Our license revenues primarily consist of fees paid to us by our licensees in exchange for the use of our trademarks on their products. Our Connected Fitness revenues consist of digital advertising, digital fitness platform licenses and subscriptions from our Connected Fitness business.
Cost of goods sold consists primarily of product costs, inbound freight and duty costs, outbound freight costs, handling costs to make products floor-ready to customer specifications, royalty payments to endorsers based on a predetermined percentage of sales of selected products and write downs for inventory obsolescence. The fabrics in many of our products are made primarily of petroleum-based synthetic materials. Therefore our product costs, as well as our inbound and outbound freight costs, could be affected by long term pricing trends of oil. In general, as a percentage of net revenues, we expect cost of goods sold associated with our apparel and accessories to be lower than that of our footwear. A limited portion of cost of goods sold is associated with license and Connected Fitness revenues, primarily website hosting costs, and other costs related tono cost of goods sold is associated with our Connected Fitness business.license revenues.
We include outbound freight costs associated with shipping goods to customers as cost of goods sold;sold, however, we include the majority of outbound handling costs as a component of selling, general and administrative expenses. As a result, our gross profit may not be comparable to that of other companies that include outbound handling costs in their cost of goods sold. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate our distribution facilities. These costs were $25.5$20.8 million and $25.7$24.2 million for the three months ended September 30, 20172019 and 2016,2018, respectively, and $74.5$63.0 million and $65.1$70.2 million for the nine months ended September 30, 20172019 and 2016, respectively.2018.
Our selling, general and administrative expenses consist of costs related to marketing, selling, product innovation and supply chain and corporate services. We consolidate our selling, general and administrative expenses into two primary categories: marketing and other. The other category is the sum of our selling, product innovation and supply chain, and corporate services categories. Personnel costs are included in these categories based on the employees’ function. Personnel costs include salaries, benefits, 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 providing and selling products 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
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 setstables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| Net revenues | $ | 1,429,456 | | | $ | 1,442,976 | | | $ | 3,825,907 | | | $ | 3,803,205 | |
| Cost of goods sold | 739,558 | | | 777,769 | | | 2,036,901 | | | 2,087,961 | |
| Gross profit | 689,898 | | | 665,207 | | | 1,789,006 | | | 1,715,244 | |
| Selling, general and administrative expenses | 550,978 | | | 527,640 | | | 1,626,309 | | | 1,594,893 | |
| Restructuring and impairment charges | — | | | 18,601 | | | — | | | 134,920 | |
| Income (loss) from operations | 138,920 | | | 118,966 | | | 162,697 | | | (14,569) | |
| Interest expense, net | (5,655) | | | (9,151) | | | (15,881) | | | (26,266) | |
| Other expense, net | (429) | | | (4,294) | | | (2,224) | | | (9,475) | |
| Income (loss) before income taxes | 132,836 | | | 105,521 | | | 144,592 | | | (50,310) | |
| Income tax expense | 29,344 | | | 30,874 | | | 31,735 | | | 691 | |
| Income (loss) from equity method investment | (1,177) | | | 619 | | | (5,414) | | | $ | 481 | |
| Net income (loss) | $ | 102,315 | | | $ | 75,266 | | | $ | 107,443 | | | $ | (50,520) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net revenues | $ | 1,405,615 |
| | $ | 1,471,573 |
| | $ | 3,611,192 |
| | $ | 3,520,058 |
|
| Cost of goods sold | 760,265 |
| | 772,949 |
| | 1,962,172 |
| | 1,863,151 |
|
| Gross Profit | 645,350 |
| | 698,624 |
| | 1,649,020 |
| | 1,656,907 |
|
| Selling, general and administrative expenses | 498,172 |
| | 499,314 |
| | 1,495,992 |
| | 1,403,336 |
|
| Restructuring and impairment charges | 84,998 |
| | — |
| | 88,097 |
| | — |
|
| Income from operations | 62,180 |
| | 199,310 |
| | 64,931 |
| | 253,571 |
|
| Interest expense, net | (9,575 | ) | | (8,189 | ) | | (25,237 | ) | | (18,476 | ) |
| Other expense, net | (1,069 | ) | | (772 | ) | | (1,383 | ) | | (1,025 | ) |
| Income before income taxes | 51,536 |
| | 190,349 |
| | 38,311 |
| | 234,070 |
|
| Income tax expense (benefit) | (2,706 | ) | | 62,124 |
| | (1,349 | ) | | 80,322 |
|
| Net income | $ | 54,242 |
| | $ | 128,225 |
| | $ | 39,660 |
| | $ | 153,748 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| (As a percentage of net revenues) | 2019 | | 2018 | | 2019 | | 2018 |
| Net revenues | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 51.7 | % | | 53.9 | % | | 53.2 | % | | 54.9 | % |
| Gross profit | 48.3 | % | | 46.1 | % | | 46.8 | % | | 45.1 | % |
| Selling, general and administrative expenses | 38.5 | % | | 36.6 | % | | 42.5 | % | | 41.9 | % |
| Restructuring and impairment charges | — | % | | 1.3 | % | | — | % | | 3.5 | % |
| Income (loss) from operations | 9.7 | % | | 8.2 | % | | 4.3 | % | | (0.4) | % |
| Interest expense, net | (0.4) | % | | (0.6) | % | | (0.4) | % | | (0.7) | % |
| Other expense, net | — | % | | (0.3) | % | | (0.1) | % | | (0.2) | % |
| Income (loss) before income taxes | 9.3 | % | | 7.3 | % | | 3.8 | % | | (1.3) | % |
| Income tax expense | 2.1 | % | | 2.1 | % | | 0.8 | % | | — | % |
| Loss from equity method investment | (0.1) | % | | — | % | | (0.1) | % | | — | % |
| Net income (loss) | 7.2 | % | | 5.2 | % | | 2.8 | % | | (1.3) | % |
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (As a percentage of net revenues) | 2017 | | 2016 | | 2017 | | 2016 |
| Net revenues | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 54.1 | % | | 52.5 | % | | 54.3 | % | | 52.9 | % |
| Gross profit | 45.9 | % | | 47.5 | % | | 45.7 | % | | 47.1 | % |
| Selling, general and administrative expenses | 35.4 | % | | 34.0 | % | | 41.4 | % | | 39.9 | % |
| Restructuring and impairment charges | 6.0 | % | | — | % | | 2.4 | % | | — | % |
| Income from operations | 4.4 | % | | 13.5 | % | | 1.8 | % | | 7.2 | % |
| Interest expense, net | (0.7 | )% | | (0.5 | )% | | (0.7 | )% | | (0.6 | )% |
| Other expense, net | (0.1 | )% | | (0.1 | )% | | — | % | | — | % |
| Income before income taxes | 3.7 | % | | 12.9 | % | | 1.1 | % | | 6.6 | % |
| Income tax expense (benefit) | (0.2 | )% | | 4.2 | % | | — | % | | 2.2 | % |
| Net income | 3.9 | % | | 8.7 | % | | 1.1 | % | | 4.4 | % |
Consolidated Results of Operations
Three Months Ended September 30, 20172019 Compared to Three Months Ended September 30, 20162018
Net revenues decreased$66.0 $13.5 million, or 4.5%0.9%, to $1,405.6$1,429.5 million for the three months ended September 30, 20172019, from $1,471.6$1,443.0 million during the same period in 2016.2018. Net revenues by product category are summarized below:
| | | | Three Months Ended September 30, | | Three Months Ended September 30, | |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change | (In thousands) | 2019 | | 2018 | |
| Apparel | $ | 939,364 |
| | $ | 1,021,185 |
| | $ | (81,821 | ) | | (8.0 | )% | Apparel | $ | 985,623 | | | $ | 978,457 | | |
| Footwear | 285,052 |
| | 278,891 |
| | 6,161 |
| | 2.2 | % | Footwear | 250,596 | | | 284,856 | | |
| Accessories | 123,487 |
| | 121,832 |
| | 1,655 |
| | 1.4 | % | Accessories | 118,164 | | | 116,186 | | |
| Total net sales | 1,347,903 |
| | 1,421,908 |
| | (74,005 | ) | | (5.2 | )% | |
| Net Sales | | Net Sales | 1,354,383 | | | 1,379,499 | | |
| License revenues | 34,324 |
| | 29,484 |
| | 4,840 |
| | 16.4 | % | License revenues | 29,602 | | | 31,363 | | |
| Connected Fitness | 23,388 |
| | 20,181 |
| | 3,207 |
| | 15.9 | % | Connected Fitness | 39,346 | | | 32,160 | | |
| Corporate Other (1) | | Corporate Other (1) | 6,125 | | | (46) | | |
| Total net revenues | $ | 1,405,615 |
| | $ | 1,471,573 |
| | $ | (65,958 | ) | | (4.5 | )% | Total net revenues | $ | 1,429,456 | | | $ | 1,442,976 | | |
(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 decrease in net sales was primarily driven primarily by:
Aby a unit sales decline in apparel unit salesfootwear in multiple categories led by outdoor, women's training and youth performance, partially offset by unit sales growth in golf and sportstyle.all categories.
License revenues increased $4.8 decreased $1.8 million, or 16.4%5.6%, to $34.3$29.6 million for the three months ended September 30, 20172019, from $29.5$31.4 million during the same period in 20162018, primarily driven primarily by increaseddecreased revenue from our licensing partners in North America. America due to softer demand.
Connected Fitness revenue increased $3.2$7.2 million, or 15.9%22.3%, to $23.4$39.3 million for the three months ended September 30, 20172019, from $20.2$32.2 million during the same period in 2016,2018, primarily driven by an increase in partnership revenue.new subscription revenue and a one-time development fee from a partner.
Gross profit decreased $53.2 increased $24.7 million to $645.4$689.9 million for the three months ended September 30, 20172019 from $698.6$665.2 million for the same period in 2016.2018. Gross profit as a percentage of net revenues, or gross margin, decreased 160increased 220 basis points to 45.9%48.3% for the three months ended September 30, 20172019, compared to 47.5%46.1% during the same period in 2016. The decrease2018. This increase in gross margin percentage was primarily driven by the following:
•approximate 100 basis point decrease due to inventory management strategies in North America including pricing and a higher concentration of sales to our off price partners, which we expect to continue for the remainder of the year;
approximate 50 basis point decrease driven by higher air freight;
approximate 50 basis point decrease due to our international business representing a higher percentage of sales, which we expect to continue for the remainder of the year; and
approximate 30 basis point decrease due to the write-off of inventory as a part of our restructuring plan.
The above decreases were partially offset by:
approximate 5090 basis point increase driven by channel mix, primarily due to a lower percentage of off-price sales within our wholesale channel;
•approximate 80 basis point increase driven by supply chain initiatives related to favorable product input costs;costs and lower air freight;
•approximate 40 basis point increase driven by restructuring related charges in the prior year period;
•approximate 20 basis point increase driven by segment mix due to a higher proportion of Connected Fitness revenues; and
•approximate 20 basis point increase driven by product mix due to a lower proportion of footwear revenues.
The above increases were partially offset by an approximate 30 basis point decrease driven by pricing, partially driven by off-price sales within our wholesale channel.
We expect benefits from channel mix and supply chain initiatives, including favorable product costs and lower air freight, for the weakeningremainder of the U.S. dollar positively impacting our gross margin within our businesses outside of the United States.year.
Selling, general and administrative expenses decreasedincreased$1.123.3 million, or 4.4%, to $498.2$551.0 million for the three months ended September 30, 20172019, from $499.3$527.6 million for the same period in 2016.2018. Within selling, general and administrative expense:
•Marketing costs increased $4.4$3.2 million to $143.9$133.9 million for the three months ended September 30, 20172019, from $139.5$130.7 million for the same period in 2016. This increase was primarily due to increased marketing in connection with the growth of our international business, partially offset by decreased marketing spend in our North America direct-to-consumer business.2018. As a percentage of net revenues, marketing costs increased to 10.2%9.4% for the three months ended September 30, 20172019 from 9.5%9.1% for the same period in 2016.2018.
•Other costs decreased $5.5increased $20.1 million to $354.3$417.1 million for the three months ended September 30, 20172019, from $359.8$397.0 million for the same period in 2016.2018. This decreaseincrease was driven primarily by the reversal ofhigher compensation expense, including additional incentive compensation accruals, which was partially offset by higher personnel and other costs incurred for the continued expansion of our direct-to-consumer distribution channel, including increased costs related to retail stores, distribution facilities and our e-commerce business.expense. As a percentage of net revenues, other costs increased to 25.2%29.2% for the three months ended September 30, 20172019 from 24.4%27.5% for the same period in 2016.2018.
As a percentage of net revenues, selling, general and administrative expenses increased to 35.4%38.5% for the three months ended September 30, 20172019, compared to 34.0%36.6% for the same period in 2016, primarily due2018.
Restructuring and impairment charges related to the decrease in net revenue described above.
Income from operations decreased $137.1 million to $62.22018 restructuring plan were $18.6 million for the three months ended September 30, 2017 from income of $199.3 million for the same period2018. There was no restructuring plan or charges in 2016, and as a percentage of net revenues decreased to 4.4% for the three months ended September 30, 2017 from 13.5% for the same period in 2016. 2019.
Income from operations for the three months ended September 30, 2017 was negatively impacted by $85.0 million of restructuring and impairment charges in connection with the restructuring plan.
Interest expense, net increased $1.4$19.9 million to $9.6$138.9 million for the three months ended September 30, 20172019, from $8.2income of $119.0 million for the same period in 2016. This increase was2018, primarily due to an increasedriven by the improvements in borrowing on our revolving credit facility.gross profit, discussed above, and $24.3 million of restructuring, impairment and restructuring related charges in the three months ended September 30, 2018, partially offset by increases in selling, general and administrative expenses, discussed above.
OtherInterest expense, net increased $0.3 decreased $3.5 million to expense of $1.1$5.7 million for the three months ended September 30, 20172019, from expense of $0.8$9.2 million for the same period in 2016.2018. This decrease was primarily due to lower interest expense as a result of the prepayment of the outstanding balance of $136.3 million on our term loan.
Provision for income taxes Other expense, netdecreased $64.8$3.9 million to a benefit of $2.7$0.4 million for the three months ended September 30, 2019, from $4.3 million for the same period in 2018. This decrease was primarily due to lower foreign exchange losses.
Income tax expense decreased $1.6 million to $29.3 million during the three months ended September 30, 20172019 from $62.1$30.9 million during the same period in 2016.2018. For the three months ended September 30, 2017,2019, our effective tax rate was (5.3)%22.1% compared to 32.6%29.3% for the same period in 2016.2018. The effective tax rate for the three months ended September 30, 20172019 was lower than the effective tax rate for the three months ended September 30, 2016,2018, primarily due to challenged resultschanges in North America creating a higherthe proportion of international profitsearnings taxed in 2017,the United States as result of the 2018 Restructuring Plan, partially offset by non-deductible goodwill impairment charges (See Note 3discrete items as a percentage of the pre-tax results in each period.
Loss from equity method investment increased $1.8 million to $1.2 million during the three months ended September 30, 2019, from income of $0.6 million during the same period in 2018 due to our Consolidated Financial Statements) andallocable share of the recordingnet loss of certain valuation allowances. our Japanese licensee, in which we hold a minority investment. We expect this loss to continue for the remainder of the year.
Nine Months Ended September 30, 20172019 Compared to Nine Months Ended September 30, 20162018
Net revenues increased $91.1$22.7 million, or 2.6%0.6%, to $3,611.2$3,825.9 million for the nine months ended September 30, 20172019, from $3,520.1$3,803.2 million during the same period in 2016.2018. Net revenues by product category are summarized below:
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | | | |
| (In thousands) | 2019 | | 2018 | | | | |
| Apparel | $ | 2,499,989 | | | $ | 2,495,723 | | | | | |
| Footwear | 827,223 | | | 828,001 | | | | | |
| Accessories | 306,406 | | | 314,250 | | | | | |
| Net Sales | 3,633,618 | | | 3,637,974 | | | | | |
| License revenues | 76,567 | | | 78,876 | | | | | |
| Connected Fitness | 101,385 | | | 90,098 | | | | | |
| Corporate Other (1) | 14,337 | | | (3,743) | | | | | |
| Total net revenues | $ | 3,825,907 | | | $ | 3,803,205 | | | | | |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change |
| Apparel | $ | 2,335,454 |
| | $ | 2,300,596 |
| | $ | 34,858 |
| | 1.5 | % |
| Footwear | 791,637 |
| | 785,843 |
| | 5,794 |
| | 0.7 | % |
| Accessories | 335,172 |
| | 302,267 |
| | 32,905 |
| | 10.9 | % |
| Total net sales | 3,462,263 |
| | 3,388,706 |
| | 73,557 |
| | 2.2 | % |
| License revenues | 83,639 |
| | 69,923 |
| | 13,716 |
| | 19.6 | % |
| Connected Fitness | 65,290 |
| | 62,179 |
| | 3,111 |
| | 5.0 | % |
| Intersegment eliminations | — |
| | (750 | ) | | 750 |
| | 100.0 | % |
| Total net revenues | $ | 3,611,192 |
| | $ | 3,520,058 |
| | $ | 91,134 |
| | 2.6 | % |
(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:
Apparel unit sales growth in men's training and golf, partially offset by a unit sales decline in outdoor;accessories due to softer demand.
Footwear unit sales growth in run, partially offset by unit sales decline in basketball; and
Accessories unit sales growth led by men's training.
License revenues increased $13.7decreased $2.3 million, or 19.6%2.9%, to $83.6 million during the nine months ended September 30, 2017 from $69.9 million during the same period in 2016, driven primarily by increased revenue from our licensing partners in North America.
Connected Fitness revenue increased $3.1 million, or 5.0%, to $65.3 million during the nine months ended September 30, 2017 from $62.2 million during the same period in 2016, primarily driven by a increases in paid subscribers and an increase in advertising and partnership revenues, partially offset by a decrease in hardware sales as we discontinued connected hardware sales as part of our restructuring plan.
Gross profit decreased $7.9 million to $1,649.0$76.6 million for the nine months ended September 30, 20172019, from $1,656.9$78.9 million during the same period in 2018, driven primarily by decreased revenue from our licensing partners in Japan and North America due to softer demand.
Connected Fitness revenue increased $11.3 million, or 12.5%, to $101.4 million for the nine months ended September 30, 2019, from $90.1 million during the same period in 2018, primarily driven by an increase in new subscription revenue and a one-time development fee from a partner.
Gross profit increased $73.8 millionto $1,789.0 million for the nine months ended September 30, 2019, from $1,715.2 million for the same period in 2016.2018. Gross profit as a percentage of net revenues, or gross margin, decreased140increased 170 basis points to 45.7%46.8% for the nine months ended September 30, 20172019, compared to 47.1% for45.1% during the same period in 2016.2018. The decreaseincrease in gross margin percentage was primarily driven by the following:
•approximate 90 basis point decrease due to inventory management and pricing strategies in North America, which we expect to continue for the remainder of the year;
approximate 50 basis point decreaseincrease driven by highersupply chain initiatives including favorable product costs and lower air freight;
approximate 30 basis point decrease due to our international business representing a higher percentage of sales, which we expect to continue for the remainder of the year; and;
approximate 20 basis point decrease driven by the strengthening of the U.S. dollar negatively impacting our gross margins within our businesses outside of the United States.
The above decreases were partially offset by:
•approximate 50 basis point increase driven by favorablerestructuring related charges in the prior year period;
•approximate 40 basis point increase driven by channel mix, primarily due to a lower percentage of off-price sales channelwithin our wholesale channel;
•approximate 30 basis point increase driven by regional and segment mix due to a higher direct to consumerproportion of Asia-Pacific and Connected Fitness revenue, respectively.
The above increases were partially offset by an approximate 40 basis point decrease driven by pricing, partially driven by off-price sales as a percentage of total sales, which wewithin our wholesale channel.
We expect to continuebenefits from channel mix and supply chain initiatives, including favorable product costs and lower air freight, for the remainder of the year.
Selling, general and administrative expensesincreased$92.731.4 million, or 2.0%,to $1,496.0$1,626.3 million for the nine months ended September 30, 20172019, from $1,403.3$1,594.9 million for the same period in 2016. 2018. Within selling, general and administrative expense:
•Marketing costs increased $14.7 million to $411.5 million for the nine months ended September 30, 2019, from $396.8 million for the same period in 2018. As a percentage of net revenues, marketing costs increased to 10.8% for the nine months ended September 30, 2019, from 10.4% for the same period in 2018.
•Other costs increased $16.7 million to $1,214.8 million for the nine months ended September 30, 2019, from $1,198.1 million for the same period in 2018. This increase was driven primarily by increased process design efficiency consulting and incentive compensation expense, partially offset by a reserve related to a commercial dispute in the prior year period. As a percentage of net revenues, other costs increased to 31.8% for the nine months ended September 30, 2019 from 31.5% for the same period in 2018.
As a percentage of net revenues, selling, general and administrative expenses increased to 41.4%42.5% for the nine months ended September 30, 2017,2019 compared to 39.9%41.9% for the same period in 2016. Within in selling, general2018.
Restructuring and administrative expense:
Marketing costs increased $38.5 millionimpairment charges related to $408.3the 2018 restructuring plan were $134.9 million for the nine months ended September 30, 2017 from $369.8 million for the same period2018. There was no restructuring plan or charges in 2016. This increase was primarily due to the timing of marketing expenses related to investments in our collegiate and professional athlete sponsorships and increased marketing in connection with the growth of our international business, partially offset by decreased marketing spend in our North America direct-to-consumer business. As a percentage of net revenues, marketing costs increased to 11.3% for the nine months ended September 30, 20172019.
Income from 10.5% for the same period in 2016.
Other costs operationsincreased $54.2$177.3 million to $1,087.7$162.7 million for the nine months ended September 30, 20172019, from $1,033.5a loss of $14.6 million for the same period in 2016. This increase was2018, primarily due to higher personnel and other costs incurred for the continued expansion of our direct to consumer distribution channel, which was partially offsetdriven by the reversalimprovements in gross profit, discussed above, and $154.0 million of incentive compensation accruals. Other costs forrestructuring, impairment and restructuring related charges in the nine months ended September 30, 2016 included $24.5 million of2018, partially offset by increases in selling, general, and administrative expenses, discussed above.
Interest expense, related to the bankruptcy and liquidation of one of our wholesale customers. As a percentage of net revenues, other costs increased to 30.1% for the nine months ended September 30, 2017, from 29.4% for the same period in 2016.
Income from operationsdecreased$188.7 $10.4 million to $64.9$15.9 million for the nine months ended September 30, 20172019 from $253.6$26.3 million for the same period in 2016, and2018. This decrease was primarily due to lower interest expense as a percentageresult of the prepayment of the outstanding balance of $136.3 million on our term loan.
Other expense, net revenues decreased $7.3 millionto 1.8% for the nine months ended September 30, 2017 from 7.2% for the same period in 2016. Income from operations for the nine months ended September 30, 2017 was negatively impacted by $88.1 million of restructuring and impairment charges in connection with the restructuring plan.
Interest expense, net increased $6.7 million to $25.2$2.2 million for the nine months ended September 30, 20172019 from $18.5$9.5 million for the same period in 2016.2018. This increasedecrease was primarily due to interest on the $600lower foreign exchange losses.
Income tax expense increased$31.0 million in Senior Notes issued in June of 2016 and an increase in borrowing on our revolving credit facility.
Other expense, net increased $0.4 million to $1.4 million for the nine months ended September 30, 2017 from$1.0 million for the same period in 2016.
Provision for income taxes decreased$81.6 million to a benefit of $1.3$31.7 million during the nine months ended September 30, 20172019 from $80.3$0.7 million of expense during the same period in 2016.2018. For the nine months ended September 30, 2017,2019, our effective tax rate was (3.5)%21.9% compared to 34.3%(1.4)% for the same period in 2016.2018. The effectiveincome tax rateexpense for the nine months ended September 30, 20172019 was lowerhigher than the effectiveincome tax rateexpense for the nine months ended September 30, 2016,2018, primarily due to challenged results in North America creating a higher proportion of international profits in 2017,pre-tax income for the nine months ended September 30, 2019 compared to pre-tax losses for the nine months ended September 30, 2018, partially offset by non-deductible goodwill impairment charges (see Note 3the impact of discrete items in each period.
Loss from equity method investment increased $5.9 million to $5.4 million during the nine months ended September 30, 2019, from income of $0.5 million during the same period in 2018 due to our Consolidated Financial Statements) andallocable share of the recordingnet loss of certain valuation allowances.our Japanese licensee, in which we hold a minority investment. We expect this loss to continue for the remainder of the year.
Segment Results of Operations
The net revenues and operating income (loss) associated with our segments are summarized in the following tables. The majority
Three Months Ended September 30, 20172019 Compared to Three Months Ended September 30, 20162018
Net revenues by segment and Corporate Other are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | | |
| (In thousands) | 2019 | | 2018 | | $ Change | | % Change |
| North America | $ | 1,015,920 | | | $ | 1,059,535 | | | $ | (43,615) | | | (4.1) | % |
| EMEA | 160,981 | | | 147,640 | | | 13,341 | | | 9.0 | % |
| Asia-Pacific | 154,898 | | | 149,388 | | | 5,510 | | | 3.7 | % |
| Latin America | 52,186 | | | 54,299 | | | (2,113) | | | (3.9) | % |
| Connected Fitness | 39,346 | | | 32,160 | | | 7,186 | | | 22.3 | % |
| Corporate Other (1) | 6,125 | | | (46) | | | 6,171 | | | 13,415.2 | % |
| Total net revenues | $ | 1,429,456 | | | $ | 1,442,976 | | | $ | (13,520) | | | (0.9) | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change |
| North America | $ | 1,077,088 |
| | $ | 1,225,188 |
| | $ | (148,100 | ) | | (12.1 | )% |
| EMEA | 127,932 |
| | 105,099 |
| | 22,833 |
| | 21.7 | % |
| Asia-Pacific | 130,320 |
| | 85,810 |
| | 44,510 |
| | 51.9 | % |
| Latin America | 46,887 |
| | 35,295 |
| | 11,592 |
| | 32.8 | % |
| Connected Fitness | 23,388 |
| | 20,181 |
| | 3,207 |
| | 15.9 | % |
| Total net revenues | $ | 1,405,615 |
| | $ | 1,471,573 |
| | $ | (65,958 | ) | | (4.5 | )% |
The decrease in total net revenues was driven by the following:
•Net revenues in our North America operating segment decreased $148.1$43.6 million to $1,077.1$1,015.9 million for the three months ended September 30, 20172019, from $1,225.2$1,059.5 million for the same period in 20162018, primarily due to lowera decrease of off-price sales within our wholesale channel and a decrease in our direct-to-consumer channel. This was partially offset by favorable impacts of returns activity within our wholesale channel, driven by approximately $12.7 million of specific customer returns that were lower demand and operational challenges.than the reserves previously established.
•Net revenues in our EMEA operating segment increased $22.8$13.3 million to $127.9$161.0 million for the three months ended September 30, 20172019, from $105.1$147.6 million for the same period in 20162018, primarily due to unit sales growth toin our wholesale partners in the United Kingdom and Germany.channel.
•Net revenues in our Asia-Pacific operating segment increased $44.5$5.5 million to $130.3$154.9 million for the three months ended September 30, 20172019, from $85.8$149.4 million for the same period in 20162018, primarily due to store growth in China and South Korea.our direct-to-consumer channel; partially offset by a decrease in our wholesale channel.
•Net revenues in our Latin America operating segment increased $11.6decreased $2.1 million to $46.9$52.2 million for the three months ended September 30, 20172019, from $35.3$54.3 million for the same period in 20162018, primarily due to decreased unit sales growthdriven by a change in our business model in Brazil from a subsidiary to a license and distributor model and a decrease in our direct-to-consumer channel; partially offset by an increase in our wholesale and direct-to-consumer channels in Brazil and Mexico.channel.
•Net revenues in our Connected Fitness operating segment increased $3.2$7.2 million to $23.4$39.3 million for the three months ended September 30, 2019, from $20.2$32.2 million for the same period in 20162018, primarily driven by an increase in partnership revenue.new subscription revenue and a one-time development fee from a partner.
Operating income (loss)by segment and Corporate Other is summarized below:
| | | | Three Months Ended September 30, | | Three Months Ended September 30, | |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change | (In thousands) | 2019 | | 2018 | | $ Change | | % Change |
| North America | $ | 65,827 |
| | $ | 182,840 |
| | $ | (117,013 | ) | | (64.0 | )% | North America | $ | 237,229 | | | $ | 253,706 | | | $ | (16,477) | | | (6.5) | % |
| EMEA | 16,977 |
| | 8,383 |
| | 8,594 |
| | 102.5 | % | EMEA | 21,989 | | | 16,726 | | | 5,263 | | | 31.5 | % |
| Asia-Pacific | 34,173 |
| | 27,151 |
| | 7,022 |
| | 25.9 | % | Asia-Pacific | 34,666 | | | 36,579 | | | (1,913) | | | (5.2) | % |
| Latin America | (10,223 | ) | | (10,550 | ) | | 327 |
| | 3.1 | % | Latin America | 233 | | | (3,772) | | | 4,005 | | | 106.2 | % |
| Connected Fitness | (44,574 | ) | | (8,514 | ) | | (36,060 | ) | | (423.5 | )% | Connected Fitness | 7,023 | | | 2,132 | | | 4,891 | | | 229.4 | % |
| Corporate Other | | Corporate Other | (162,220) | | | (186,405) | | | 24,185 | | | 13.0 | % |
| Total operating income | $ | 62,180 |
| | $ | 199,310 |
| | $ | (137,130 | ) | | (68.8 | )% | Total operating income | $ | 138,920 | | | $ | 118,966 | | | $ | 19,954 | | | 16.8 | % |
The decreaseincrease in total operating income was driven by the following:following segment results:
•Operating income in our North America operating segment decreased $117.0$16.5 million to $65.8$237.2 million operating income for the three months ended September 30, 20172019, from $182.8$253.7 million for the same period in 20162018, primarily due to thedriven by decreases in net sales and gross marginrevenues discussed above, in the Consolidated Resultspartially offset by supply chain initiatives including favorable product costs.
•Operating income in our EMEA operating segment increased $8.6$5.3 millionto $17.0$22.0 million for the three months ended September 30, 20172019, from $8.4$16.7 million for the same period in 20162018, primarily due the sales growthdriven by increases in net revenues discussed above.
above, which was partially offset by continued investment in operations.•Operating income in our Asia-Pacific operating segment increaseddecreased$7.01.9 million to $34.2$34.7 million for the three months ended September 30, 20172019, from $27.2$36.6 million for the same period in 20162018, primarily due to the sales growth discussed above. This increase was offsetdriven by continued investments in our direct to consumerdirect-to-consumer business and entry into new territories.
higher compensation expense, partially offset by better than planned pricing on inventory reserved in prior quarters.•Operating lossincome in our Latin America operating segment decreased $0.3increased $4.0 million to $10.2$0.2 million for the three months ended September 30, 20172019, from $10.6a loss of $3.8 million for the same period in 20162018, primarily duedriven by expense management and changes to the sales growth discussed above, partially offset by $6.0 millionour business model in restructuring and impairment chargesBrazil.
•Operating lossincome in our Connected Fitness segment increased $36.1$4.9 million to $44.6$7.0 million for the three months ended September 30, 2017 from $8.52019, compared to $2.1 million for the same period in 2016 2018, primarily due to $47.8 milliondriven by the increase in restructuring and impairment charges.
net revenues discussed above, partially offset by increased selling expenses.Nine Months Ended September 30, 20172019 Compared to Nine Months Ended September 30, 20162018
Net revenuesby segment and Corporate Other are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | | | |
| (In thousands) | 2019 | | 2018 | | $ Change | | % Change |
| North America | $ | 2,675,389 | | | $ | 2,770,463 | | | $ | (95,074) | | | (3.4) | % |
| EMEA | 440,405 | | | 414,170 | | | 26,235 | | | 6.3 | % |
| Asia-Pacific | 453,296 | | | 390,647 | | | 62,649 | | | 16.0 | % |
| Latin America | 141,095 | | | 141,570 | | | (475) | | | (0.3) | % |
| Connected Fitness | 101,385 | | | 90,098 | | | 11,287 | | | 12.5 | % |
| Corporate Other (1) | 14,337 | | | (3,743) | | | 18,080 | | | 483.0 | % |
| Total net revenues | $ | 3,825,907 | | | $ | 3,803,205 | | | $ | 22,702 | | | 0.6 | % |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change |
| North America | $ | 2,778,165 |
| | $ | 2,932,915 |
| | $ | (154,750 | ) | | (5.3 | )% |
| EMEA | 334,683 |
| | 237,559 |
| | 97,124 |
| | 40.9 | % |
| Asia-Pacific | 309,712 |
| | 188,985 |
| | 120,727 |
| | 63.9 | % |
| Latin America | 123,342 |
| | 99,170 |
| | 24,172 |
| | 24.4 | % |
| Connected Fitness | 65,290 |
| | 62,179 |
| | 3,111 |
| | 5.0 | % |
| Intersegment eliminations | — |
| | (750 | ) | | 750 |
| | 100.0 | % |
| Total net revenues | $ | 3,611,192 |
| | $ | 3,520,058 |
| | $ | 91,134 |
| | 2.6 | % |
The increase in total net revenues was driven by the following:
•Net revenues in our North America operating segment decreased $154.8$95.1 millionto $2,778.2$2,675.4 million for the nine months ended September 30, 20172019, from $2,932.9$2,770.5 million for the same period in 20162018, primarily due to lowera decrease of off-price sales inwithin our wholesale channel drivenand a decrease in our direct-to consumer channel. This was partially offset by favorable impacts of returns activity within our wholesale channel, inclusive of approximately $20.4 million of specific customer returns that were lower demand and operational challenges.
than the reserves previously established.•Net revenues in our EMEA operating segment increased $97.1$26.2 million to $334.7$440.4 million for the nine months ended September 30, 20172019, from $237.6$414.2 million for the same period in 20162018, primarily due to unit sales growth toin our wholesale partners in the United Kingdom and Germany.direct-to-consumer channels.
•Net revenues in our Asia-Pacific operating segment increased $120.7$62.6 millionto $309.7$453.3 million for the nine months ended September 30, 20172019, from $189.0$390.6 million for the same period in 20162018, primarily due to store growth in Chinaour wholesale and South Korea.direct-to-consumer channels.
•Net revenues in our Latin America operating segment increased $24.2decreased $0.5 million to $123.3$141.1 million for the nine months ended September 30, 20172019, from $99.2$141.6 million for the same period in 20162018, primarily due to decreased unit sales growthdriven by a change in our business model in Brazil from a subsidiary to a license and distributor model and a decrease in our direct-to-consumer channel; partially offset by an increase in our wholesale partners and through our direct to consumer channels in Mexico, Chile, and Brazil.channel.
•Net revenues in our Connected Fitness operating segment increased $3.1$11.3 million to $65.3$101.4 million for the nine months ended September 30, 20172019, from $62.2$90.1 million for the same period in 20162018, primarily driven by a increases in paid subscribers and an increase in advertisingnew subscription revenue and partnership revenuesa one-time development fee from a partner. This was partially offset by a decrease in hardware sales.media revenue.
Operating income (loss) by segment and Corporate Other is summarized below: | | | | Nine Months Ended September 30, | | Nine Months Ended September 30, | |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change | (In thousands) | 2019 | | 2018 | | $ Change | | % Change |
| North America | $ | 64,124 |
| | $ | 251,084 |
| | $ | (186,960 | ) | | (74.5 | )% | North America | $ | 536,700 | | | $ | 534,421 | | | $ | 2,279 | | | 0.4 | % |
| EMEA | 13,990 |
| | 8,348 |
| | 5,642 |
| | 67.6 | % | EMEA | 44,700 | | | 17,935 | | | 26,765 | | | 149.2 | % |
| Asia-Pacific | 69,050 |
| | 54,399 |
| | 14,651 |
| | 26.9 | % | Asia-Pacific | 74,116 | | | 82,092 | | | (7,976) | | | (9.7) | % |
| Latin America | (26,175 | ) | | (27,751 | ) | | 1,576 |
| | 5.7 | % | Latin America | (4,017) | | | (10,339) | | | 6,322 | | | 61.1 | % |
| Connected Fitness | (56,058 | ) | | (32,509 | ) | | (23,549 | ) | | (72.4 | )% | Connected Fitness | 8,103 | | | 7,254 | | | 849 | | | 11.7 | % |
| Total operating income | $ | 64,931 |
| | $ | 253,571 |
| | $ | (188,640 | ) | | (74.4 | )% | |
| Corporate Other | | Corporate Other | (496,905) | | | (645,932) | | | 149,027 | | | 23.1 | % |
| Total operating income (loss) | | Total operating income (loss) | $ | 162,697 | | | $ | (14,569) | | | $ | 177,266 | | | 1,216.7 | % |
The decreaseincrease in total operating income was driven by the following:following segment results:
•Operating income in our North America operating segment decreased $187.0increased $2.3 million to $64.1$536.7 million for the nine months ended September 30, 20172019, from $251.1$534.4 million for the same period in 20162018, primarily due to thedriven by supply chain initiatives including favorable product costs and expense management, partially offset by decreases in net sales and gross marginrevenues discussed above in the Consolidated Results of Operations and $33.6 million in restructuring and impairment charges. Operating income in our North America operating segment for the nine months ended September 30, 2016 was negatively impacted by $24.5 million of expense related to the liquidation of one of our wholesale customers.above.
•Operating income in our EMEA operating segment increased $5.6$26.8 millionto $14.0$44.7 million for the nine months ended September 30, 20172019, from $8.3$17.9 million for the same period in 20162018, primarily due sales growthdriven by increases in net revenues discussed above which was partially offset by costsand a reserve related to a distributor termination.commercial dispute in the prior year period.
•Operating income in our Asia-Pacific operating segment increased$14.7decreased $8.0 millionto $69.1$74.1 million for the nine months ended September 30, 20172019, from $54.4$82.1 million for the same period in 20162018, primarily due to the sales growth discussed above. This increase was offsetdriven by higher compensation expense and investments in our direct to consumer business and entry into new territories.
direct-to-consumer business.•Operating loss in our Latin America operating segment decreased $1.6$6.3 million to $26.2$4.0 million for the nine months ended September 30, 20172019, from $27.8$10.3 million for the same period in 20162018, primarily duedriven by expense management and changes to the sales growth discussed above partially offset by $6.5 millionour business model in restructuring and impairment charges.Brazil.
•Operating lossincome in our Connected Fitness segment increased $23.5$0.8 million to $56.1$8.1 million for the nine months ended September 30, 20172019, from $32.5$7.3 million for the same period in 2016 2018, primarily due to $47.8 milliondriven by the increase in restructuring and impairment charges.
Seasonality
Historically, we have recognized a majority of our net revenues and a significant portion of our income from operations in the last two quarters of the year, driven primarilydiscussed above, offset by increased sales volume of our products during the fallapplication enhancements and 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.expenses.
Financial Position, Capital Resources and Liquidity
Our cash requirements have principally been for working capital and capital expenditures. We fund our working capital, primarily inventory, and capital investments from cash flows from operating activities, cash and cash equivalents on hand, and borrowings available under our credit and long term debt facilities. Our working capital requirements generally reflect the seasonality and growth in our business as we recognize the majority of our net revenues in the last two quarters of the year. Our capital investments have included expanding our in-store fixture and branded concept shop program, improvements and expansion of our distribution and corporate facilities to support our growth, leasehold improvements to our brand and factory house stores, and investment and improvements in information technology systems.
Our inventory strategy is focused on continuing to meet consumer demand while improving our inventory efficiency over the long term by putting systems and processes in place to improve our inventory management. These systems and processes are designed to improve our forecasting and supply planning capabilities. In addition to systems and processes, key areas of focus that we believe will enhance inventory performance are added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our factory house stores and other liquidation channels.
We believe our cash and cash equivalents on hand, cash from operations, our ability to access the debt capital markets, and borrowings available to us under our credit agreement and other financing instruments are adequate to
meet our liquidity needs and capital expenditure requirements for at least the next twelve months. As of September 30, 2017,2019, we had $1.0 billion of remaining availabilityno amounts outstanding under our revolving credit facility. Although we believe we have adequate sources of liquidity over the long term, an economic recession or a slow recovery could adversely affect our business and liquidity. In addition, instability in, or tightening of the capital markets, could adversely affect our ability to obtain additional capital to grow our business on terms acceptable to us or at all.
Cash Flows
The following table presents the major components of net cash flows provided by and used in operating, investing and financing activities for the periods presented:
| | | | Nine Months Ended September 30, | | Nine Months Ended September 30, | |
| (In thousands) | 2017 | | 2016 | (In thousands) | 2019 | | 2018 |
| Net cash provided by (used in): | | | | Net cash provided by (used in): | |
| Operating activities | $ | (29,193 | ) | | $ | (36,033 | ) | Operating activities | $ | 102,468 | | | $ | 118,817 | |
| Investing activities | (227,572 | ) | | (316,042 | ) | Investing activities | (107,040) | | | (154,223) | |
| Financing activities | 256,881 |
| | 402,273 |
| Financing activities | (138,692) | | | (106,709) | |
| Effect of exchange rate changes on cash and cash equivalents | 7,416 |
| | (96 | ) | Effect of exchange rate changes on cash and cash equivalents | 4,809 | | | 520 | |
| Net increase in cash and cash equivalents | $ | 7,532 |
| | $ | 50,102 |
| |
| Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | $ | (138,455) | | | $ | (141,595) | |
Operating Activities
Operating activities consist primarily of net income (loss) adjusted for certain non-cash items. Adjustments to net income for non-cash items include depreciation and amortization, unrealized foreign currency exchange rate gains and losses, losses on disposals of property and equipment, impairment charges, stock-based compensation, excess tax benefits from stock-based compensation arrangements, deferred income taxes and changes in reserves and allowances. In addition, operating cash flows include the effect of changes in operating assets and liabilities, principally inventories, accounts receivable, income taxes payable and receivable, prepaid expenses and other assets, accounts payable and accrued expenses.
Cash used inprovided by operating activities decreased $6.8$16.3 million to $29.2$102.5 million for the nine months ended September 30, 20172019 from $36.0$118.8 million duringfor the same period in 2016.2018. The decrease in cash used inprovided by operating activities was due to primarily driven by the following:
•a decrease in net cash outflows from operating assetsprovided by a change in accrued expenses and other liabilities of $42.7$165.8 million for the nine months ended September 30, 2019 as compared to the same period in 2018;
•a decrease in cash provided by a change in accounts receivable of $163.7 million for the nine months ended September 30, 2019 as compared to the same period in 2018; and
•a decrease in cash provided by a change in accounts payable of $30.0 million for the nine months ended September 30, 2019 as compared to the same period in 2018 .
This was partially offset by ana decrease in net income adjusted for non-cash items of $35.9 million. The decrease in cash outflows related to changes in operating assets$195.9 million and liabilities period over period was primarily driven by:
an increase in thecash provided by a change in accounts receivableinventory of $204.1$153.8 million infor the current periodnine months ended September 30, 2019 as compared to the priorsame period in 2018, primarily due to the timing of cash collections from new customers; partially offset by
a decrease in income taxes payable and receivable of $127.2 million and a decrease in inventories of $57.2 million.improved inventory management efforts.
Investing Activities
Cash used in investing activities decreased $88.4$47.2 million to $227.6$107.0 million for the nine months ended September 30, 20172019 from $316.0$154.2 million for the same period in 2016,2018, primarily due to lower capital expenditures.expenditures and the purchase of an additional 10% common stock ownership in Dome Corporation ("Dome"), our Japanese licensee in the prior year.
Capital expenditures for the full year 20172019 are expected to be approximately $300.0$180.0 million, comprised primarily of investments in our distribution centersretail stores, global wholesale fixtures, corporate offices and retail stores.digital initiatives.
Financing Activities
Cash provided byused in financing activities decreasedincreased$145.432.0 million to $256.9$138.7 million for the nine months ended September 30, 20172019 from $402.3$106.7 million forof cash used in financing activities during the same period in 2016. This decrease was primarily due to lower borrowings on our revolving credit facility.2018.
Capital Resources
Credit Facility
We are party to aOn March 8, 2019, we entered into an amended and restated credit agreement, thatamending and restating our prior credit agreement. As amended and restated, our credit agreement has a term of five years, maturing in March 2024, and provides revolving credit commitments for up to $1.25$1.25 billion of borrowings, as well aswith no term loan commitments, in each case maturing in January 2021.borrowings, which were provided for under our prior credit agreement. As of September 30, 2017,2019, there was $270.0 millionwere no amounts outstanding under our revolving credit facility. As of December 31, 2018, there were no amounts outstanding under the revolving credit facility and $167.5$136.3 million outstanding under the term loan. In January 2019, we prepaid the outstanding balance of $136.3 million on our term loan, borrowings outstanding.without penalty.
At our request and the lender's consent, revolving and or term loan borrowingscommitments under the credit agreement may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the credit agreement, as amended. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time we seek to incur such borrowings.
The borrowings under the revolving credit facility have maturities of less than one year. Up to $50.0 million of the facility may be used for the issuance of letters of credit. There were $4.6$5.1 million of letters of credit outstanding as of September 30, 2017.2019.
The credit agreement contains negative covenants that, subject to significant exceptions, limit our ability to, among other things, incur additional indebtedness, make restricted payments, pledge our assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. We are also required to maintain a ratio of consolidated EBITDA, as defined in the credit agreement, to consolidated interest expense of not less than 3.50 to 1.00, and we are not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.00 ("consolidated leverage ratio"). The method of calculating these ratios is set forth in our credit agreement and differs from how rating agencies or other companies may calculate similar measures. As of September 30, 2017,2019, we were in compliance with these ratios. In addition, the credit agreement contains events of default that are customary for a facility of this nature, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the credit agreement, will be considered an event of default under the credit agreement.
Borrowings under the credit agreement bear interest at a rate per annum equal to, at our option, either (a) an alternate base rate, or (b) a rate based on the rates applicable for deposits in the interbank market for U.S. Dollars or the applicable currency in which the loans are made (“adjusted LIBOR”), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “Pricing Grid”) based on the consolidated leverage ratio and ranges between 1.00% to 1.25% for adjusted LIBOR loans and 0.00% to 0.25% for alternate base rate loans. During the three months ended September 30, 2019, there were no borrowings under the revolving credit facility. The weighted average interest ratesrate under the outstanding term loans and revolving credit facility borrowings were 2.4%was 3.3% during the three months ended September 30, 2018, and 2.2% during3.6% and 3.0% for the nine months ended September 30, 20172019 and 2016,2018, respectively. The weighted average interest rate under the outstanding term loan was 3.3% and 3.1% during the three and nine months ended September 30, 2018, respectively. We pay a commitment fee on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit. As of September 30, 2017,2019, the commitment fee was 15.0 basis points.
3.250% Senior Notes
In June 2016, we issued $600.0 million aggregate principal amount of 3.250% senior unsecured notes due June 15, 2026 (the “Notes”). The proceeds were used to pay down amounts outstanding under the revolving credit facility. Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes), we may redeem some or all of the Notes at any time or from time to time at a redemption price equal to the greater of 100% of the principal amount of the Notes to be redeemed or a “make-whole”"make-whole" amount applicable to such Notes as described in the indenture governing the Notes, plus accrued and unpaid interest to, but excluding, the redemption date. On or after March 15, 2026 (three months prior to the maturity date of the Notes), we may redeem some or all of the Notes at any time or from time to time at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The indenture governing the Notes contains covenants, including limitations that restrict our ability and the ability of certain of our subsidiaries to create or incur secured indebtedness and enter into sale and leaseback transactions and our ability to consolidate, merge or transfer all or substantially all of our properties or assets to another person, in each case subject to material exceptions described in the indenture.
Other Long Term Debt
In December 2012, we entered into a $50.0 million recourse loan collateralized by the land, buildings and tenant improvements comprising our corporate headquarters. The loan has a seven year term and maturity date of December 2019. The loan bears interest at one month LIBOR plus a margin of 1.50%, and allows for prepayment without penalty. The loan includes covenants and events of default substantially consistent with our credit agreement discussed above. The loan also requires prior approval of the lender for certain matters related to the property, including transfers of any interest in the property. As of September 30, 2017, December 31, 2016 and September 30, 2016, the outstanding balance on theIn July 2018, this loan was $40.5 million, $42.0 million and $42.5 million, respectively. The weighted average interest rate on the loan was 2.7% and 2.5% for the three and nine months ended September 30, 2017, respectively.paid in full using borrowings under our revolving credit facility.
Interest expense, net, was $9.6$5.7 million and $8.2$9.2 million for the three months ended September 30, 20172019 and 2016,2018, respectively and $25.2$15.9 million and $18.5$26.3 million for the nine months ended September 30, 2017,2019 and 2016,2018, 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.
We monitor the financial health and stability of our lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets, lenders could be negatively impacted in their ability to perform under these facilities.
Contractual Commitments and Contingencies
Other than the borrowings and repayments disclosed above in the "Capital Resources" section and changes which occur in the normal course of business, there were no significant changes to the contractual obligations reported in our 20162018 Form 10-K as updated in our Form 10-Q for the quarter ended September 30, 2017.2019.
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.U.S. GAAP. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. Actual results could be significantly different from these estimates. We believe the following addresses the critical accounting policies that are necessary to understand and evaluate our reported financial results.
Our significant accounting policies are described in Note 2 of the audited consolidated financial statements included in our 20162018 Form 10-K. The SEC suggests companies provide additional disclosure on those accounting policies considered most critical. The SEC considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgments and estimates on the part of management in its application. Our estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. For a complete discussion of our critical accounting policies, see the “Critical Accounting Policies” section of the MD&A in our 20162018 Form 10-K. ThereOther than adoption of recent accounting standards as discussed in Note 2 of our consolidated financial statements, there were no significant changes to our critical accounting policies during the nine months ended September 30, 2017.2019.
Recently Issued Accounting Standards
Refer to Note 2 to the notes toof our consolidated financial statements, included in this Form 10-Q, for our assessment of recently issued accounting standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to our market risk since December 31, 2016.2018. For a discussion of our exposure to market risk, refer to our Annual Report on Form 10-K for the year ended December 31, 2016.2018.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
In 2015, we began the process of implementing a global operating and financial reporting information technology system, SAP Fashion Management Solution ("FMS"), as part of a multi-year plan to integrate and upgrade our systems and processes. The first phase of this implementation became operational onin July 5, 2017, in our North America, EMEA, and Connected Fitness operations. The second phase of this implementation became operational in April 2019 in China and South Korea. We believe the implementation of the systems and related changes to internal controls will enhance our internal controls over financial reporting. We also believe the necessary steps have been taken to monitor and maintain appropriate internal control over financial reporting during this period of change and we 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,continues, we will continue to experience certain changes to our processes and procedures which, in turn, result in changes to our internal control over financial reporting. In addition, we believe that our robust assessment provides effective global coverage for key control activities that support our internal controls over financial reporting conclusion. While we expect FMS to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as each of the affected areas evolve. For a discussion of risks related to the implementation of new systems, see Item 1A - "Risk Factors - Risks Related to Our Business - RisksThe process of implementing a new operating and information system, which involves risks and uncertainties associated with the implementation of information systems may negatively impactthat could adversely affect our business"business " in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.
There have been no other changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) during the most recent fiscal quarter that hashave materially affected, or that isare reasonably likely to materially affect our internal control over financial reporting.
During the quarter ended March 31, 2019, we implemented controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new lease accounting standard on our financial statements in connection with the adoption of ASU 2016-02 on January 1, 2019. We also implemented controls to support the lease system and accounting under this ASU to monitor and maintain appropriate internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in litigation and other proceedings, including matters related to commercial and intellectual property, as well as trade, regulatory and other claims related to our business. See Note 56to our Consolidated Financial Statements for information on certain legal proceedings, which is incorporated by reference herein.
ITEM 1A. RISK FACTORS
In addition to the other information in this Quarterly Report on Form 10-Q, you should carefully consider the Risk Factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2016.2018. The Company is supplementing those risk factors by adding the Risk Factor set forth below.
Our restructuring plan may not be successful, or we may not fully realizeresults of operations are affected by the expected benefitsperformance of our restructuring plan or other operating or cost-saving initiatives.equity investment, over which we do not exercise control.
During the third quarter of 2017, we announced
We maintain a restructuring plan designed to more closely align our financial resources against the critical priorities of our business. This plan included a reductionminority investment in our global workforce, as well as other initiativesJapanese licensee, which we account for under the equity method, and are required to improve operational efficiencies. Restructuring plans present significant potential risks that may impairrecognize our ability to achieve anticipated operating improvements and/allocable share of its net income or cost reductions. These risks include, among others, higher than anticipated costsloss in implementing our restructuring plans, management distraction from ongoing business activities, damage to our reputation and brand image and workforce attrition beyond planned reductions. If we are unable to successfully implement and manage our restructuring plans, we may not achieve our targeted operational improvements and efficiencies, including planned cost reductions. This could adversely impact our operating results andconsolidated financial condition, and our futurestatements. Our results of operations. In addition, ifoperations are affected by the performance of that business, over which we fail to achieve targeted operating improvements and/or cost reductions, we may bedo not exercise control. We are also required to implement additional restructuring-related activities, whichregularly review our investment 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 dilutive togenerated from our earnings in the short term.investment.
ITEM 6. EXHIBITS
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Exhibit
No.
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| Third Amended and Restated Bylaws of Under Armour, Inc. as amended (effective January 1, 2020). |
| 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) |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| UNDER ARMOUR, INC. | |
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| UNDER ARMOUR, INC. |
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| By: | /s/ DAVID E. BERGMAN |
| | David E. Bergman |
| | Chief Financial Officer
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Date: November 8, 2017
2019
