See accompanying notes.
Under Armour, Inc. and Subsidiaries
See accompanying notes.
Under Armour, Inc. and Subsidiaries
See accompanying notes.
Under Armour, Inc. and Subsidiaries
| | | | | | | | | | | |
| Reconciliation of cash, cash equivalents and restricted cash | September 30, 2022 | | September 30, 2021 |
| Cash and cash equivalents | $ | 853,652 | | | $ | 1,253,706 | |
| Restricted cash | 14,361 | | | 12,696 | |
| Total cash, cash equivalents and restricted cash | $ | 868,013 | | | $ | 1,266,402 | |
See accompanying notes.
Under Armour, Inc. and Subsidiaries
Notes to the UnauditedCondensed Consolidated Financial Statements
(Unaudited; Tabular amounts in thousands, except share and per share data)
NOTE 1. Description of the DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Business
Under Armour, Inc. (together with its wholly owned subsidiaries, the "Company") is a developer, marketer and distributor of branded athletic performance apparel, footwear and accessories. TheseThe Company creates products engineered to make athletes better with a vision to inspire performance solutions you never knew you needed and can't imagine living without. The Company's products are made, sold worldwide and worn by athletes at all levels,worldwide.
Fiscal Year End Change
As previously disclosed, the Company changed its fiscal year end from youthDecember 31 to professional on playing fields aroundMarch 31, effective for the globe, as well as by consumers with active lifestyles.fiscal year beginning April 1, 2022. The Under Armour Connected FitnessTM platform powers the world's largest digital health and fitness community. The Company uses this platform to engage its consumers and increase awareness and sales of its products.
2. Summary of Significant Accounting PoliciesCompany's current fiscal year will run from April 1, 2022 through March 31, 2023 (Fiscal 2023). Consequently, there was no Fiscal 2022.
Basis of Presentation
The accompanying consolidated financial statementsunaudited Condensed Consolidated Financial Statements are presented in U.S. Dollars and include the accounts of Under Armour, Inc. and its wholly owned subsidiaries (the “Company”).subsidiaries. Certain information in footnote disclosures normally included in annual financial statements waswere condensed or omitted for the interim periods presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”"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 statementpresentation of the financial position and results of operations were included. Intercompany balances and transactions were eliminated. eliminated upon consolidation.
The consolidated balance sheetunaudited Condensed Consolidated Balance Sheet as of December 31, 2016September 30, 2022 is derived from the audited financial statements included in the Company’sCompany's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("Fiscal 2021"), filed with the SEC on February 23, 2022 ("Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”Fiscal 2021"), which should be read in conjunction with these consolidated financial statements.unaudited Condensed Consolidated Financial Statements and the Company's Transition Report on Form 10-QT for the three months ended March 31, 2022, filed with the SEC on May 9, 2022. The unaudited results for the three and ninesix months ended September 30, 2017,2022, are not necessarily indicative of the results to be expected for the year ending December 31, 2017Fiscal 2023, or any other portions thereof.
On June 3, 2016, the Board of Directors approved the payment of a $59.0 million dividend to the holders of the Company's Class C stock in connection with shareholder litigation related to the creation of the Class C stock. The Company's Board of Directors approved the payment of this dividend in the form of additional shares of Class C stock, with cash in lieu of any fractional shares. This dividend was distributed on June 29, 2016, in the form of 1,470,256 shares of Class C stock and $2.9 million in cash.
Concentration of Credit Risk
Financial instruments that subject the Company to significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable is due from large retailers. Credit is extended based on an evaluation of each customer’s financial condition and collateral is not required. The Company's largest customer accounted for 13.1%, 16.0% and 20.2% of accounts receivable as of September 30, 2017, December 31, 2016 and September 30, 2016, respectively. For the nine months ended September 30, 2017, no customer accounted for more than 10% of the Company's net revenues. For the nine months ended September 30, 2016, the Company's largest customer accounted for 11.0% of net revenues.
Allowance for Doubtful Accounts
As of September 30, 2017, December 31, 2016 and September 30, 2016, the allowance for doubtful accounts was $13.1 million, $11.3 million and $33.6 million, respectively.
Shipping and Handling Costs
The Company charges certain customers shipping and handling fees. These fees are recorded in net revenues. The Company includes the majority of outbound handling costs as a component of selling, general and administrative expenses. Outbound handling costs include costs associated with preparing goods to ship to customers and certain costs to operate the Company’s distribution facilities. These costs, included within selling, general and administrative expenses, were $25.5 million and $25.7 million for the three months ended September 30, 2017 and 2016, respectively, and $74.5 million and $65.1 million, for the nine months ended September 30, 2017 and 2016, respectively. The Company includes outbound freight costs associated with shipping goods to customers as a component of cost of goods sold.
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, judgments, 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 statementsunaudited Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. ActualThese estimates, judgments and assumptions are evaluated on an on-going basis. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable at that time; however, actual results could differ from these estimates.
DuringAs the three months ending September 30, 2017, asimpacts of major global events, including the COVID-19 pandemic, continue to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. The extent to which the evolving events impact the Company's financial statements will depend on a changenumber of factors including, but not limited to, any new information that may emerge concerning the severity of these major events and the actions that governments around the world may take in estimate,response. While the Company reversed $12.3 millionbelieves it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of incentive compensation accruals relating tothis reporting date, the Company may experience further impacts based on long-term effects on the Company's customers and the countries in which the Company operates. Please see the risk factors discussed in Part I, Item 1A "Risk Factors" of the Company's Annual Report on Form 10-K for Fiscal 2021.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Account Pronouncements
The Company assesses the applicability and impact of all Accounting Standard Updates ("ASUs"). There were no ASUs adopted during the first two quartershalf of 2017.Fiscal 2023.
Recently Issued Accounting StandardsPronouncements
In May 2014,September 2022, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards UpdateASU 2022-04 "Liabilities - Supplier Finance Programs (Subtopic 405-50)" ("ASU"ASU 2022-04") 2014-09, which supersedes the most current revenue recognition requirements. This ASU requires entities to recognize revenuedisclose the key terms of supplier finance programs used in a way that depictsconnection with the transferpurchase of goods orand services to customers in an amount that reflectsalong with information about their obligations under these programs, including a rollforward of those obligations. ASU 2022-04, with the consideration which the entity expects to be entitled to in exchange for those goods or services. This ASU will be effective for annual and interim periods beginning after December 15, 2017, with early adoption for annual and interim periods beginning after December 15, 2016 permitted.
The Company’s initial assessmentexception of the guidance in this ASU has identified wholesale customer support costs, direct to consumer incentive programs and customer related returns as transactions potentially affected by this guidance. While the Company has not completed its evaluation, it expects the impact of the adoption of this ASU would primarily change presentation within our consolidated financial statements but is currently not expected to have a material effect on income from operations.
The Company will adopt the guidance in this new ASU effective January 1, 2018, and plans to use the modified retrospective transition approach, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying this guidance to contracts in effect as of the adoption date. Under this approach, we would not restate the prior financial statements presented. The guidance in this ASU requires us to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018 as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes, if any.
In February 2016, the FASB issued ASU 2016-02, which amends the existing guidance for leases and will require recognition of operating leases with lease terms of more than twelve months and all financing leases on the balance sheet. For these leases, companies will record assets for the rights and liabilities for the obligations that are created by the leases. This ASU will require disclosures that provide qualitative and quantitative information for the lease assets and liabilities recorded in the financial statements. This ASUrollforward requirement, is effective for fiscal years beginning after December 15, 2018.2022 and should be applied retrospectively to all periods for which a balance sheet is presented. The rollforward requirement is effective for fiscal years beginning after December 15, 2023 and should be applied prospectively. Early adoption is permitted. The Company is currently evaluating this ASU to determine the impact of its adoption on its consolidated financial statements.
NOTE 3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company currently anticipates adoptingCompany's allowance for doubtful accounts was established with information available as of September 30, 2022, including reasonable and supportable estimates of future risk.
The following table illustrates the new standard effective January 1, 2019. The Company has formed a committee and initiated the review process for adoption of this ASU. While the Company is stillactivity in the processCompany's allowance for doubtful accounts:
| | | | | | | | | | | |
| Allowance for doubtful accounts - within accounts receivable, net | | Allowance for doubtful accounts - within prepaid expenses and other current assets (1) |
| Balance at March 31, 2022 | $ | 7,113 | | | $ | 7,029 | |
| Increases (decreases) to costs and expenses | 139 | | | — | |
| Write-offs, net of recoveries | (851) | | | — | |
| Balance at September 30, 2022 | $ | 6,401 | | | $ | 7,029 | |
(1) Includes an allowance pertaining to a royalty receivable.
NOTE 4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of completing its analysis on the complete impact this ASU will have on its consolidated financial statementsfollowing:
| | | | | | | | | | | |
| As of September 30, 2022 | | As of March 31, 2022 |
| Leasehold and tenant improvements | $ | 456,260 | | | $ | 461,394 | |
| Furniture, fixtures and displays | 265,161 | | | 263,749 | |
| Buildings | 48,599 | | | 48,382 | |
| Software | 360,640 | | | 339,722 | |
| Office equipment | 130,024 | | | 132,452 | |
| Plant equipment | 178,188 | | | 178,188 | |
| Land | 83,626 | | | 83,626 | |
Construction in progress (1) | 110,782 | | | 64,869 | |
| Other | 13,079 | | | 5,751 | |
| Subtotal property and equipment | 1,646,359 | | | 1,578,133 | |
| Accumulated depreciation | (1,009,613) | | | (976,768) | |
| Property and equipment, net | $ | 636,746 | | | $ | 601,365 | |
(1) Construction in progress primarily includes costs incurred for construction of corporate offices, software systems, leasehold improvements and related disclosures, it expects the ASU to have a material impact on its consolidated balance sheet for recognition of lease-related assetsin-store fixtures and liabilities.displays not yet placed in use.
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 taxDepreciation 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 benefitsproperty and deficiencies have been classified within cash flows from operating activities and employee taxes paid for shares withheld for income taxes have been classified within cash flows from financing activities on the Consolidated Statement of Cash Flows. This resulted in an increase of $44.4 million to the cash flows from operating activities section and a decrease of $13.7 million to the cash flows from financing activities section of the Consolidated Statement of Cash Flowsequipment for the ninethree and six months ended September 30, 2016.
In October 2016, the FASB issued ASU 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted the provisions of this ASU on a modified retrospective basis on January 1, 2017, resulting in a cumulative-effect benefit to retained earnings of $26.02022 was $33.2 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$67.1 million, during its interim goodwill impairment test for the Connected Fitness reporting unit.
3. Restructuringrespectively (three and Impairment
A description of significant restructuring and related impairment charges is included below:
Restructuring
On July 27, 2017, the Company’s Board of Directors approved a restructuring plan (the “restructuring plan”) to more closely align its financial resources with the critical priorities of the business. The Company’s original expectation was to incur estimated pre-tax restructuring and related charges of approximately $110.0 to $130.0 million for the year ended December 31, 2017. In the third quarter of 2017, the Company recognized approximately $59.9 million of pre-tax charges in connection with this restructuring plan, which included $31.2 million of asset impairments and $28.7 million of restructuring related charges including employee related severance, contract terminations and other restructuring related costs. In addition to these charges, the Company also recognized restructuring related goodwill impairment charges of approximately $28.6 million for its Connected Fitness business which was not included in the Company’s original range estimate. Inclusive of the goodwill impairment, the Company now expects to incur total pre-tax restructuring and related charges of approximately $140.0 to $150.0 million for the year ending December 31, 2017.
Impairment
As a part of the restructuring plan, the Company abandoned the use of several assets included within Property and Equipment, resulting in an impairment charge of $14.4 million, reducing the carrying value of these assets to their estimated fair values. Fair value was estimated using an income-approach based on Management’s forecast of future cash flows expected to be derived from the assets' use.
Additionally, in connection with the restructuring plan, strategic decisions were made during the third quarter in 2017 to abandon the use of certain intangible assets in the Company's Connected Fitness reporting unit. These intangible assets included technology and brand names, resulting in total intangible asset impairment charges of $12.1 million, reducing the carrying value of these assets to their estimated fair values. Fair value was estimated using an income-approach based on management’s forecast of future cash flows expected to be derived from the assets use. In addition, the Company also made the strategic decision to not pursue certain other planned future revenue streams in connection with the restructuring plan.
The Company determined sufficient indication existed to trigger the performance of an interim goodwill impairment for Company’s Connected Fitness reporting unit. Using updated cash flow projections, the Company calculated the fair value of the Connected Fitness reporting unit based on the discounted cash flows model. The carrying value exceeded the fair value, resulting in an impairment of goodwill. As the excess of the carrying value for the Connected Fitness reporting unit was greater than the goodwill for this reporting unit, all $28.6 million of goodwill was impaired.
The summary of the costs incurred during the three and ninesix months ended September 30, 2017, as well as2021: $36.7 million and $72.5 million, respectively).
NOTE 5. LEASES
The Company enters into operating leases domestically and internationally to lease certain warehouse space, office facilities, space for its Brand and Factory House stores, and certain equipment under non-cancelable operating leases. The leases expire at various dates through 2035, excluding extensions at the Company’s current estimates of the amount expected to be incurred during the remainder of 2017, are 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 |
| |
(1) This table includes an additional non-cash charge of $3.6 millionCompany's option, and include provisions for rental adjustments. Short-term lease payments were not material for the three and ninesix months ended September 30, 2017 associated with the reduction of inventory outside of current liquidation channels in line with the restructuring plan.2022 and 2021.
(2) Estimated restructuringLease Costs and impairment charges to be incurred reflect the high-end of the range of the estimated remaining charges expected to be taken by the Company during 2017 in connection with the restructuring plan.
4. Long Term Debt
Credit FacilityOther Information
The Company recognizes lease expense on a straight-line basis over the lease term.
The following table illustrates operating and variable lease costs, included in selling, general and administrative expenses within the Company's Condensed Consolidated Statements of Operations, for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Six months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Operating lease costs | $ | 36,010 | | | $ | 35,630 | | | $ | 71,565 | | | $ | 72,038 | |
| Variable lease costs | $ | 4,360 | | | $ | 4,650 | | | $ | 7,983 | | | $ | 9,105 | |
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 partynot material.
The weighted average remaining lease term and discount rate for the periods indicated below were as follows: | | | | | | | | | | | |
| As of September 30, 2022 | | As of March 31, 2022 |
| Weighted average remaining lease term (in years) | 8.24 | | 8.69 |
| Weighted average discount rate | 4.26 | % | | 3.72 | % |
Supplemental Cash Flow Information
The following table presents supplemental information relating to a credit agreement that provides revolving credit commitments for up to $1.25 billioncash flow arising from lease transactions: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Six months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Operating cash outflows from operating leases | $ | 42,254 | | | $ | 44,161 | | | $ | 84,119 | | | $ | 89,126 | |
| Leased assets obtained in exchange for new operating lease liabilities | $ | 87,971 | | | $ | 5,348 | | | $ | 107,560 | | | $ | 14,322 | |
Maturity of borrowings,Lease Liabilities
The following table presents the future minimum lease payments under the Company's operating lease liabilities as well as term loan commitments, in each case maturing in January 2021. of September 30, 2022: | | | | | |
| Fiscal year ending March 31, |
| 2023 (six months ending) | $ | 79,425 | |
| 2024 | 165,195 | |
| 2025 | 145,072 | |
| 2026 | 113,355 | |
| 2027 | 95,046 | |
| 2028 and thereafter | 397,650 | |
| Total lease payments | $ | 995,743 | |
| Less: Interest | 158,532 | |
| Total present value of lease liabilities | $ | 837,211 | |
As of September 30, 2017,2022, the Company has additional operating lease obligations that have not yet commenced of approximately $3.3 million, which are not reflected in the table above.
NOTE 6. GOODWILL
The following table summarizes changes in the carrying amount of the Company's goodwill by reportable segment as of the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America | | EMEA | | Asia-Pacific | | Latin America | | Total |
| Balance as of March 31, 2022 | $ | 301,371 | | | $ | 105,053 | | | $ | 85,084 | | | $ | — | | | $ | 491,508 | |
| Effect of currency translation adjustment | — | | | (14,195) | | | (8,981) | | | — | | | (23,176) | |
| Balance as of September 30, 2022 | $ | 301,371 | | | $ | 90,858 | | | $ | 76,103 | | | $ | — | | | $ | 468,332 | |
NOTE 7. INTANGIBLE ASSETS, NET
The following tables summarize the Company's intangible assets as of the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of September 30, 2022 |
| Useful Lives from Date of Acquisitions (in years) | | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount |
| Intangible assets subject to amortization: | | | | | | |
| Technology | 5-7 | | $ | 2,536 | | | $ | (2,303) | | | $ | 233 | |
| Customer relationships | 2-6 | | 8,070 | | | (3,395) | | | 4,675 | |
| Lease-related intangible assets | 1-15 | | 9,022 | | | (8,860) | | | 162 | |
| Other | 5-10 | | 475 | | | (451) | | | 24 | |
| Total | | | $ | 20,103 | | | $ | (15,009) | | | $ | 5,094 | |
| Indefinite-lived intangible assets | | | | | | | 4,197 | |
| Intangible assets, net | | | | | | | $ | 9,291 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of March 31, 2022 |
| Useful Lives from Date of Acquisitions
(in years) | | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount |
| Intangible assets subject to amortization: | | | | | | |
| Technology | 5-7 | | $ | 2,536 | | | $ | (2,103) | | | $ | 433 | |
| Customer relationships | 2-6 | | 8,552 | | | (2,893) | | | 5,659 | |
| Lease-related intangible assets | 1-15 | | 9,112 | | | (8,892) | | | 220 | |
| Other | 5-10 | | 475 | | | (427) | | | 48 | |
| Total | | | $ | 20,675 | | | $ | (14,315) | | | $ | 6,360 | |
| Indefinite-lived intangible assets | | | | | | | 4,220 | |
| Intangible assets, net | | | | | | | $ | 10,580 | |
Amortization expense, which is included in selling, general and administrative expenses, for the three and six months ended September 30, 2022 was $0.5 million and $0.9 million, respectively (three and six months ended September 30, 2021: $0.5 million and $1.0 million, respectively).
The following is the estimated amortization expense for the Company's intangible assets as of September 30, 2022: | | | | | |
| Fiscal year ending March 31, |
| 2023 (six months ending) | $ | 949 | |
| 2024 | 1,443 | |
| 2025 | 1,404 | |
| 2026 | 1,289 | |
| 2027 | 9 | |
| 2028 and thereafter | — | |
| Total amortization expense of intangible assets | $ | 5,094 | |
NOTE 8. CREDIT FACILITY AND OTHER LONG TERM DEBT
The Company's outstanding debt consisted of the following: | | | | | | | | | | | |
| As of
September 30, 2022 | | As of
March 31, 2022 |
| 1.50% Convertible Senior Notes due 2024 | $ | 80,919 | | | $ | 80,919 | |
| 3.25% Senior Notes due 2026 | 600,000 | | | 600,000 | |
| Total principal payments due | 680,919 | | | 680,919 | |
| | | |
| Unamortized debt discount on Senior Notes | (941) | | | (1,067) | |
| Unamortized debt issuance costs - Convertible Senior Notes | (472) | | | (677) | |
| Unamortized debt issuance costs - Senior Notes | (1,997) | | | (2,266) | |
| Unamortized debt issuance costs - Credit facility | (4,127) | | | (4,623) | |
| Total amount outstanding | 673,382 | | | 672,286 | |
| Less: | | | |
| Current portion of long-term debt: | | | |
| Credit Facility borrowings | — | | | — | |
| | | |
| Non-current portion of long-term debt | $ | 673,382 | | | $ | 672,286 | |
Credit Facility
On March 8, 2019, the Company entered into an amended and restated credit agreement by and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and arrangers party thereto (the "credit agreement"). In May 2020, May 2021 and December 2021, the Company entered into the first, second and third amendments to the credit agreement, respectively (the credit agreement as amended, the "amended credit agreement" or the "revolving credit facility"). The amended credit agreement provides for revolving credit commitments of $1.1 billion and has a term that ends on December 3, 2026, with permitted extensions under certain circumstances. As of September 30, 2022 and March 31, 2022, there was $270.0 millionwere no amounts outstanding under the revolving credit facility and $167.5 million of term loan borrowings outstanding.facility.
At the Company's request and thea lender's consent, revolving and or term loan borrowingscommitments under the amended credit agreement may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the amended credit agreement, as amended.agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time the Company seeks to incur such borrowings.
The borrowingsBorrowings, if any, 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. ThereAs of September 30, 2022, there were $4.6$4.5 million of letters of credit outstanding as(March 31, 2022: $4.5 million).
The obligations of September 30, 2017.the Company under the amended credit agreement are guaranteed by certain domestic significant subsidiaries of Under Armour, Inc., subject to customary exceptions (the "subsidiary guarantors") and primarily secured by a first-priority security interest in substantially all of the assets of Under Armour, Inc. and the subsidiary guarantors, excluding real property, capital stock in and debt of subsidiaries of Under Armour, Inc. holding certain real property and other customary exceptions. The amended credit agreement provides for the permanent fall away of guarantees and collateral upon the Company's achievement of investment grade rating from two rating agencies.
The amended credit agreement contains negative covenants that, subject to significant exceptions, limit the Company's ability of the Company and its subsidiaries to, among other things,things: incur additional indebtedness, make restricted payments,secured and unsecured indebtedness; pledge theirthe assets as security,security; make investments, loans, advances, guarantees and acquisitions (including investments in and loans to non-guarantor subsidiaries); undergo fundamental changes andchanges; sell assets outside the ordinary course of business; enter into transactions with affiliates. affiliates; and make restricted payments.
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 1.001.0 (the "interest coverage covenant") and the Company is not permitted to allow the ratio of consolidated total indebtedness to consolidated EBITDA to be greater than 3.25 to 1.00 ("consolidated leverage ratio"1.0 (the "leverage covenant"). The method of calculating these ratios is set forth, as described in more detail in the Company'samended credit agreement and differs from how rating agencies or other companies may calculate similar measures.agreement. As of September 30, 2017,2022, the Company was in compliance with these ratios. the applicable covenants.
In addition, the amended credit agreement contains events of default that are customary for a facility of this nature, and includes a cross default provision whereby an event of default under other material indebtedness, as defined in the amended credit agreement, will be considered an event of default under the amended credit agreement.
The amended credit agreement implements SOFR as the replacement of LIBOR as a benchmark interest rate for U.S. dollar borrowings (and analogous benchmark rate replacements for borrowings in Yen, Canadian Dollars, Pound Sterling and Euro). Borrowings under the amended credit agreement bear interest at a rate per annum equal to, at the Company’sCompany's option, either (a) an alternate base rate or(for borrowings in U.S. dollars), (b) a term rate based on the rates applicable for deposits(for borrowings in the interbank market for U.S. Dollarsdollars, Euro, Japaneses Yen or the applicable currencyCanadian Dollars) or (c) a "risk free" rate (for borrowings in which the loans are made (“adjusted LIBOR”)U.S. dollars or Pounds Sterling), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “Pricing Grid”"pricing grid") based on the consolidated leverage ratio of consolidated total indebtedness to consolidated EBITDA and ranges between 1.00% to 1.25% for adjusted LIBOR1.75% (or, in the case of alternate base loans, and 0.00% to 0.25% for alternate base rate loans. The weighted average interest rates under the outstanding term loans and revolving credit facility borrowings were 2.4% and 2.2% during the three and nine months ended September 30, 2017, respectively.0.75%). The Company payswill also pay a commitment fee determined in accordance with the pricing grid on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit. As of September 30, 2017,2022, the commitment fee was 15.015 basis points. Since inception,
1.50% Convertible Senior Notes
In May 2020, the Company incurredissued $500.0 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the "Convertible Senior Notes"). The Convertible Senior Notes bear interest at the rate of 1.50% per annum, payable semiannually in arrears on June 1 and deferred $3.9December 1 of each year, beginning December 1, 2020. The Convertible Senior Notes will mature on June 1, 2024, unless earlier converted in accordance with their terms, redeemed in accordance with their terms or repurchased.
The net proceeds from the offering (including the net proceeds from the exercise of the over-allotment option) were $488.8 million, after deducting the initial purchasers' discount and estimated offering expenses paid by the Company, of which the Company used $47.9 million to pay the cost of the capped call transactions described below. The Company utilized $439.9 million to repay indebtedness that was outstanding under its revolving credit facility at the time, and to pay related fees and expenses.
The Convertible Senior Notes are not secured and are not guaranteed by any of the Company's subsidiaries. The indenture governing the Convertible Senior Notes does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries.
In May 2021 and August 2021, the Company entered into exchange agreements with certain holders of the Convertible Senior Notes, who agreed to exchange $250.0 million and approximately $169.1 million, respectively, in financing costsaggregate principal amount of the Convertible Senior Notes for cash and/or shares of the Company's Class C Common Stock, plus payment for accrued and unpaid interest (the "Exchanges"). In connection with the Exchanges, the Company paid approximately $300.0 million and $207.0 million cash, respectively, and issued approximately 11.1 million and 7.7 million shares of the Company's Class C Common Stock, respectively, to the exchanging holders. Additionally, the Company recognized losses on debt extinguishment of $34.7 million during the second quarter of Fiscal 2021 and $23.8 million during the third quarter of Fiscal 2021, which were recorded within Other Income (Expense), net on the Company's Condensed Consolidated Statements of Operations. Following the Exchanges, approximately $80.9 million aggregate principal amount of the Convertible Senior Notes remain outstanding.
The Convertible Senior Notes are convertible into cash, shares of the Company's Class C Common Stock or a combination of cash and shares of Class C Common Stock, at the Company's election, as described further below. The initial conversion rate is 101.8589 shares of the Company's Class C Common Stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $9.82 per share of Class C Common Stock), subject to adjustment if certain events occur. Prior to the close of business on the business day immediately preceding January 1, 2024, holders may (at their option) convert their Convertible Senior Notes only upon satisfaction of one or more of the following conditions:
•during any calendar quarter commencing after the calendar quarter ended on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company's Class C Common Stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's Class C Common Stock and the conversion rate on each such trading day;
•upon the occurrence of specified corporate events or distributions on the Company's Class C Common Stock; or
•if the Company calls any Convertible Senior Notes for redemption prior to the close of business on the business day immediately preceding January 1, 2024.
On or after January 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Senior Notes at the conversion rate at any time irrespective of the foregoing conditions.
On or after December 6, 2022, the Company may redeem for cash all or any part of the Convertible Senior Notes, at its option, if the last reported sale price of the Company's Class C Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If the Company undergoes a fundamental change (as defined in the indenture governing the Convertible Senior Notes) prior to the maturity date, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Senior Notes in principal amounts of $1,000 or an integral multiple thereof at a price which will be equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Concurrently with the offering of the Convertible Senior Notes, the Company entered into privately negotiated capped call transactions with JPMorgan Chase Bank, National Association, HSBC Bank USA, National Association, and Citibank, N.A. (the "option counterparties"). The capped call transactions are expected generally to reduce potential dilution to the Company's Class C Common Stock upon any conversion of Convertible Senior Notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted Convertible Senior Notes upon any conversion thereof, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions is initially $13.4750 per share of the Company's Class C Common Stock, representing a premium of 75% above the last reported sale price of the Company's Class C Common Stock on May 21, 2020, and is subject to certain adjustments under the terms of the capped call transactions.
In May 2021 and August 2021, concurrently with the Exchanges, the Company entered into, with each of the option counterparties, termination agreements relating to a number of options corresponding to the number of Convertible Senior Notes exchanged. Pursuant to such termination agreements, each of the option counterparties paid the Company a cash settlement amount in respect of the portion of capped call transactions being terminated. The Company received approximately $53.0 million and $38.6 million, respectively, in connection with such termination agreements related to the credit agreement.Exchanges.
The Convertible Senior Notes contain a cash conversion feature. Prior to the adoption of ASU 2020-06, the Company had separated it into liability and equity components. The Company valued the liability component based on its borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which was recognized as a debt discount, was valued as the difference between the face value of the Convertible Senior Notes and the fair value of the liability component.
The Company adopted ASU 2020-06 on January 1, 2022 using the modified retrospective method. As a result, the Convertible Senior Notes are no longer accounted for as separate liability and equity components, but rather a single liability. See Note 2 to the Condensed Consolidated Financial Statements included in Part I of the Company's Transition Report of Form 10-QT for the three months ended March 31, 2022 for more details.
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”"Senior Notes"). The proceeds were used to pay down amounts outstanding under the revolving credit facility. Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes), theThe Company may redeem some or all of the Senior Notes at any time, or from time
to time, at a redemption price equal to the greater of 100% of the principal amount of the Notes to be redeemed or a “make-whole” amount applicable to such Notes asprices described in the indenture governing the Notes, plus accrued and unpaid interest to, but excluding, the redemption date. On or after March 15, 2026 (three months prior to the maturity date of the Notes), the Company may redeem some or all of the Notes at any time or from time to time at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Senior Notes. The indenture governing the Senior Notes contains negative covenants including limitations that restrictlimit the Company’sCompany's ability and the ability ofto engage in certain of its subsidiaries to create or incur secured indebtedness and enter into sale and leaseback transactions and the Company’s ability to consolidate, merge or transfer all or substantially all of its properties or assets to another person, in each caseare subject to material exceptions described in the indenture. The Company has incurred and deferred $5.3$5.4 million in financing costs in connection with the Senior Notes.
Other Long Term Debt
In December 2012, the Company entered into a $50.0 million recourse loan collateralized by the land, buildings and tenant improvements comprising the Company's corporate headquarters. The loan has a seven year term and maturity date of December 2019. The loan bears interest at one month LIBOR plus a margin of 1.50%, and allows for prepayment without penalty. The loan includes covenants and events of default substantially consistent with the Company's credit agreement discussed above. The loan also requires prior approval of the lender for certain matters related to the property, including transfers of any interest in the property. As of September 30, 2017, December 31, 2016 and September 30, 2016, the outstanding balance on the loan was $40.5 million, $42.0 million and $42.5 million, respectively. The weighted average interest rate on the loan was 2.7% and 2.5% for the three and nine months ended September 30, 2017, respectively.Interest Expense
Interest expense net was $9.6 million and $8.2 million for the three months ended September 30, 2017 and 2016, respectively, and $25.2 million and $18.5 million for the nine months ended September 30, 2017, and 2016, respectively. Interest expense includes the amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities. Interest expense, net, for the three and six months ended September 30, 2022 was $3.6 million and $9.6 million, respectively (three and six months ended September 30, 2021: $9.3 million and $22.6 million, respectively).
Maturity of Long Term Debt
The following are the scheduled maturities of long term debt as of September 30, 2022: | | | | | |
| Fiscal year ending March 31, |
| 2023 (six months ending) | $ | — | |
| 2024 | — | |
| 2025 | 80,919 | |
| 2026 | — | |
| 2027 | 600,000 | |
| 2028 and thereafter | |
| Total scheduled maturities of long term debt | $ | 680,919 | |
| |
| Current maturities of long term debt | $ | — | |
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. Commitments and Contingencies
There were no significant changes to the contractual obligations reported in the 2016 Form 10-K other than those which occur in the normal course of business.
In connection with various contracts and agreements, the Company has agreed to indemnify counterparties against certain third party claims relating to the infringement of intellectual property rights and other items. Generally, such indemnification obligations do not apply in situations in which the counterparties are grossly negligent, engage in willful misconduct, or act in bad faith. Based on the Company’s historical experience and the estimated probability
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.NOTE 9. COMMITMENTS AND CONTINGENCIES
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 thatbusiness. However, the ultimate resolution of any such proceedings will not havematters described below, if decided adversely to or settled by the Company, could result, individually or in the aggregate, in a liability material adverse effect on itsto the Company's consolidated financial position, results of operations or cash flows.
In re Under Armour Securities Litigation
On March 23, 2017, three 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”"Consolidated Securities Action"). On August 4, 2017,November 6 and December 17, 2019, two additional putative securities class actions were filed in the lead plaintiffDistrict Court against the Company and certain of its current and former executives (captioned Patel v. Under Armour, Inc., No. 1:19-cv-03209-RDB ("Patel"), and Waronker v. Under Armour, Inc., No. 1:19-cv-03581-RDB ("Waronker"), respectively). On September 14, 2020, the District Court issued an order that, among other things, consolidated the Patel and Waronker cases into the Consolidated Securities Action.
The operative complaint (the Third Amended Complaint or the "TAC") in the Consolidated Securities Action, North East Scotland Pension Fund (“NESFP”),was filed a consolidated amended complaint (the “Amended Complaint”) against the Company, the Company’s Chief Executive Officeron October 14, 2020. The TAC asserts claims under Sections 10(b) and former Chief Financial Officers, Lawrence Molloy and Brad Dickerson. The Amended Complaint alleges violations of Section 10(b) (and Rule 10b-5)20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"), against the Company and Mr. Plank and under Section 20(a) control person liability under20A of the Exchange Act against the officers named in the Amended Complaint, claimingMr. Plank. The TAC alleges that the defendants made material misstatementssupposedly concealed purportedly declining consumer demand for certain of the Company's products between the third quarter of 2015 and omissionsthe fourth quarter of 2016 by making allegedly false and misleading statements regarding the Company's performance and future prospects and by engaging in undisclosed and allegedly improper sales and accounting practices, including shifting sales between quarterly periods allegedly to appear healthier. The TAC also alleges that the defendants purportedly failed to disclose that the Company was under investigation by and cooperating with the U.S. Department of Justice ("DOJ") and the U.S. Securities and Exchange Commission (the "SEC") since July 2017. The class period identified in the TAC is September 16, 2015 through November 1, 2019.
Discovery in the Consolidated Securities Action commenced on June 4, 2021 and is currently ongoing. On July 23, 2021, the Company and Mr. Plank filed an answer to the TAC denying all allegations of wrongdoing and asserting affirmative defenses to the claims asserted in the TAC. On December 1, 2021, the plaintiffs filed a motion seeking, among other things, certification of the class they are seeking to represent in the Consolidated Securities Action. On September 29, 2022, the court granted the plaintiffs' class certification motion.
The Company continues to believe that the claims asserted in the Consolidated Securities Action are without merit and intends to defend the lawsuit vigorously.
State Court Derivative Complaints
In June and July 2018, two purported stockholder derivative complaints were filed in Maryland state court (in cases captioned Kenney v. Plank, et al. (filed June 29, 2018) and Luger v. Plank, et al. (filed July 26, 2018), respectively). The cases were consolidated on October 19, 2018 under the caption Kenney v. Plank, et. al. The consolidated complaint in the Kenney matter names Mr. Plank, certain other current and former members of the Company's Board of Directors, certain former Company executives, and Sagamore Development Company, LLC ("Sagamore") as defendants, and names the Company as a nominal defendant. The consolidated complaint asserts breach of fiduciary duty, unjust enrichment, and corporate waste claims against the individual defendants and asserts a claim against Sagamore for aiding and abetting certain of the alleged breaches of fiduciary duty. The consolidated complaint seeks damages on behalf of the Company and certain corporate governance related actions.
The consolidated complaint includes allegations challenging, among other things, the Company's disclosures related to growth and consumer demand for certain of the Company's products.products, as well as stock sales by certain individual defendants. The class period identifiedconsolidated complaint also makes allegations related to the Company's 2014 purchase from entities controlled by Mr. Plank (through Sagamore) of certain parcels of land to accommodate the Company's growth needs, which was approved by the Audit Committee of the Company's Board of Directors in accordance with the Company's policy on transactions with related persons.
On March 29, 2019, the court in the Amended Complaint is September 16, 2015 through January 30, 2017.consolidated Kenney action granted the Company's and the defendants' motion to stay that case pending the outcome of both the Consolidated Securities Action and an earlier-filed derivative action asserting similar claims to those asserted in the Kenney action relating to the Company's purchase of parcels in Port Covington (which derivative action has since been dismissed in its entirety).
A new plaintiff, Bucks County Employees Retirement Fund (“Bucks County”)Prior to the filing of the derivative complaints in Kenney v. Plank, et al. and Luger v. Plank, et al., joined NESFP in filingboth of the Amended Complaint. In additionpurported stockholders had sent the Company's Board of Directors a letter demanding that the Company pursue claims similar to joining the claims noted above, Bucks County also asserts claims under Sections 11asserted in the derivative complaints. Following an investigation, a majority of disinterested and 15independent directors of the Securities Act of 1933, as amended (the “Securities Act”), in connection withCompany determined that the Company’s public offering of senior unsecured notes in June 2016. The Securities Act claims are asserted againstshould not be pursued by 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 underwritersinformed both of these purported stockholders of that participateddetermination.
In 2020, two additional purported shareholder derivative complaints were filed in Maryland state court, in cases captioned Cordell v. Plank, et al. (filed August 11, 2020) and Salo v. Plank, et al. (filed October 21, 2020), respectively.
The complaints in the offering. Bucks County alleges thatCordell and Salo cases name Mr. Plank, certain other current and former members of the offering materials utilizedCompany's Board of Directors, and certain current and former Company executives as defendants, and name the Company as a nominal defendant. The complaints in connection withthese actions assert allegations similar to those in the offering contained false and/or misleading statements and omissions regarding, among other things,TAC filed in the Company’sConsolidated Securities Action matter discussed above, including allegations challenging (i) the Company's disclosures related to growth and consumer demand for certain of the Company’s products.Company's products; (ii) the Company's practice of shifting sales between quarterly periods supposedly to appear healthier and its purported failure to disclose that practice; (iii) the Company's internal controls with respect to revenue recognition and inventory management; (iv) the Company's supposed failure to timely disclose investigations by the SEC and DOJ; (v) the compensation paid to the Company's directors and executives while the alleged wrongdoing was occurring; and/or (vi) stock sales by certain individual defendants. The complaints assert breach of fiduciary duty, unjust enrichment, and corporate waste claims against the individual defendants. These complaints seek damages on behalf of the Company and certain corporate governance related actions.
Prior to the filing of the derivative complaints in these two actions, neither of the purported stockholders made a demand that the Company's Board of Directors pursue the claims asserted in the complaints.
In October 2021, the court issued an order (i) consolidating the Cordell and Salo actions with the consolidated Kenney action into a single consolidated derivative action (the "Consolidated State Derivative Action"); (ii) designating the Kenney action as the lead case; and (iii) specifying that the scheduling order in the Kenney action shall control the Consolidated State Derivative Action.
On December 20, 2021, the court issued an order dismissing the Consolidated State Derivative Action for lack of prosecution pursuant to Maryland Rule 2-507 without prejudice to plaintiffs' right to reinstate the action.
In September 2022, the Consolidated State Derivative Action was reopened, with a docket entry indicating that it had been closed in error. Also in September 2022, the court issued an order striking the appearance of Kenneth W. Ravenell as counsel for Kenney and warning that if new Maryland counsel has not entered an appearance within fifteen days after Kenney’s receipt of such notice, the case might be dismissed. On October 19, 2022, the court dismissed the Kenney action and ordered that the Kenney action and all consolidated cases be closed. On October 28, 2022, Plaintiffs filed a motion to vacate the order of dismissal. That motion is currently pending.
The Company believes that the claims asserted in the Consolidated State Derivative Action are without merit and intends to defend the lawsuitthis matter vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of the outcome of this matter.
Federal Court Derivative Complaints
In July 2018, a stockholder derivative complaint was filed in the District Court, in a case captioned Andersen v. Plank, et al. The complaint in the Andersen matter names Mr. Plank, certain other current and former members of the Company's Board of Directors and certain former Company executives as defendants, and names the Company as a nominal defendant. The complaint asserts breach of fiduciary duty and unjust enrichment claims against the individual defendants, and seeks damages on behalf of the Company and certain corporate governance related actions. The complaint includes allegations challenging, among other things, the Company's disclosures related to growth and consumer demand for certain of the Company's products and stock sales by certain individual defendants. 6. Fair Value MeasurementsIn September 2020, two additional derivative complaints were filed in the District Court (in cases captioned Olin v. Plank, et al., and Smith v. Plank, et al., respectively). On November 20, 2020, another derivative complaint was filed in the District Court, in a case captioned Viskovich v. Plank, et al. The complaints in the Olin, Smith, and Viskovich cases name Mr. Plank, certain other current and former members of the Company's Board of Directors, and certain current and former Company executives as defendants, and name the Company as a nominal defendant. The complaints in these actions assert allegations similar to those in the TAC filed in the Consolidated Securities Action matter discussed above, including allegations challenging (i) the Company's disclosures related to growth and consumer demand for certain of the Company's products; (ii) the Company's practice of shifting sales between quarterly periods supposedly to appear healthier and its purported failure to disclose that practice; (iii) the Company's internal controls with respect to revenue recognition and inventory management; (iv) the Company's supposed failure to timely disclose investigations by the SEC and DOJ; and/or (v) the compensation paid to the Company's directors and executives while the alleged wrongdoing was occurring. The complaints assert breach of fiduciary duty, unjust enrichment, gross mismanagement, and/or corporate waste claims against the individual defendants. The Viskovich complaint also asserts a contribution claim against certain defendants under the federal securities laws. These complaints seek damages on behalf of the Company and certain corporate governance related actions.
On January 27, 2021, the District Court entered an order consolidating for all purposes the Andersen, Olin, Smith and Viskovich actions into a single action under the caption Andersen v. Plank, et al. (the "Federal Court Derivative Action"). In February 2021, counsel for the Smith and Olin plaintiffs, on the one hand, and counsel for the Andersen and Viskovich plaintiffs, on the other hand, filed motions seeking to be appointed as lead counsel in the Federal Court Derivative Action. These motions are currently pending.
The Company believes that the claims asserted in the Federal Court Derivative Action are without merit and intends to defend this matter vigorously. However, because of the inherent uncertainty as to the outcome of this proceeding, the Company is unable at this time to estimate the possible impact of the outcome of this matter.
Contingencies
In accordance with Accounting Standards Codification (“ASC”) Topic 450 “Contingencies” (“Topic 450”), the Company establishes accruals for contingencies when (i) the Company believes it is probable that a loss will be incurred and (ii) the amount of the loss can be reasonably estimated. If the reasonable estimate is a range, the Company will accrue the best estimate in that range; where no best estimate can be determined, the Company will accrue the minimum. As of September 30, 2022, the Company has estimated its liability and recorded $20 million in respect of certain ongoing legal proceedings summarized above. The timing of the resolution is unknown and the amount of loss ultimately incurred in connection with these matters may be substantially higher or lower than the amount accrued for these matters, and the Company expects a portion of the loss, if any is incurred, to be covered
by the Company’s insurance. Legal proceedings for which no accrual has been established are disclosed to the extent required by ASC 450.
From time to time, the Company’s view regarding probability of loss with respect to outstanding legal proceedings will change, proceedings for which the Company is able to estimate a loss or range of loss will change, and the estimates themselves will change. In addition, while many matters presented in financial disclosures involve significant judgment and may be subject to significant uncertainties, estimates with respect to legal proceedings are subject to particular uncertainties. Other than as described above, the Company believes that all current proceedings are routine in nature and incidental to the conduct of its business. However, the matters described above, if decided adversely to or settled by the Company, could result, individually or in the aggregate, in a liability material to the Company's consolidated financial position, results of operations or cash flows.
NOTE 10. STOCKHOLDERS' EQUITY
The Company's Class A Common Stock and Class B Convertible Common Stock have an authorized number of 400.0 million shares and 34.45 million shares, respectively, and each have a par value of $0.0003 1/3 per share as of September 30, 2022. Holders of Class A Common Stock and Class B Convertible Common Stock have identical rights, including liquidation preferences, except that the holders of Class A Common Stock are entitled to one vote per share and holders of Class B Convertible Common Stock are entitled to 10 votes per share on all matters submitted to a stockholder vote. Class B Convertible Common Stock may only be held by Kevin Plank, the Company's founder, Executive Chairman and Brand Chief, or a related party of Mr. Plank, as defined in the Company's charter. As a result, Mr. Plank has a majority voting control over the Company. Upon the transfer of shares of Class B Convertible Stock to a person other than Mr. Plank or a related party of Mr. Plank, the shares automatically convert into shares of Class A Common Stock on a one-for-one basis. In addition, all of the outstanding shares of Class B Convertible Common Stock will automatically convert into shares of Class A Common Stock on a one-for-one basis upon the death or disability of Mr. Plank or on the record date for any stockholders' meeting upon which the shares of Class A Common Stock and Class B Convertible Common Stock beneficially owned by Mr. Plank is less than 15% of the total shares of Class A Common Stock and Class B Convertible Common Stock outstanding or upon the other events specified in the Class C Articles Supplementary to the Company's charter as documented below. Holders of the Company's common stock are entitled to receive dividends when and if authorized and declared out of assets legally available for the payment of dividends.
The Company's Class C Common Stock has an authorized number of 400.0 million shares and have a par value of $0.0003 1/3 per share as of September 30, 2022. The terms of the Class C Common Stock are substantially identical to those of the Company's Class A Common Stock, except that the Class C Common Stock has no voting rights (except in limited circumstances), will automatically convert into Class A Common Stock under certain circumstances and includes provisions intended to ensure equal treatment of Class C Common Stock and Class B Common Stock in certain corporate transactions, such as mergers, consolidations, statutory share exchanges, conversions or negotiated tender offers, and including consideration incidental to these transactions.
Share Repurchase Program
On February 23, 2022, the Company's Board of Directors authorized the Company to repurchase up to $500 million (exclusive of fees and commissions) of outstanding shares of the Company's Class C Common Stock over the next two years. The Class C Common Stock may be repurchased from time to time at prevailing prices in the open market, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, via private purchases through forward, derivative, accelerated share repurchase transactions or otherwise, subject to applicable regulatory restrictions on volume, pricing and timing. The timing and amount of any repurchases will depend on market conditions, the Company's financial condition, results of operations, liquidity and other factors.
During the three months ended September 30, 2022, the Company entered into a master confirmation, including a supplemental confirmation (the "August ASR Agreement"), of an accelerated share repurchase transaction with HSBC Bank USA, national Association ("HSBC") to repurchase $25.0 million of the Company's Class C Common Stock, and received a total of 3.2 million shares of Class C Common Stock from HSBC, which were immediately retired. As a result, $24.7 million was recorded to retained earnings to reflect the difference between the market price of the Class C Common Stock repurchased and its par value.
During the six months ended September 30, 2022, pursuant to the August ASR Agreement and the previously disclosed accelerated share repurchase transactions that the Company entered into in February 2022 and May 2022 (together with the August ASR Agreement, the "ASR Agreements"), the Company repurchased 9.9 million shares of Class C Common Stock, which were immediately retired. As a result, $99.4 million was
recorded to retained earnings to reflect the difference between the market price of the Class C Common Stock repurchased and its par value.
As of September 30, 2022, the Company has repurchased $350 million or 26.1 million outstanding shares of its Class C Common Stock under its share repurchase program. The number of shares was determined based on the average of the Rule 10b-18 volume-weighted average prices of the Company’s Class C Common Stock during the terms of the transactions, less an agreed discount, and subject to adjustments pursuant to the terms of the ASR Agreements.
NOTE 11. REVENUES
The following tables summarize the Company's net revenues by product category and distribution channels: | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Apparel | $ | 1,038,268 | | | $ | 1,058,231 | | | $ | 1,906,696 | | | $ | 1,932,424 | |
| Footwear | 375,885 | | | 329,718 | | | 723,136 | | | 672,359 | |
| Accessories | 111,117 | | | 126,345 | | | 207,948 | | | 237,848 | |
| Net Sales | 1,525,270 | | | 1,514,294 | | | 2,837,780 | | | 2,842,631 | |
| License revenues | 33,123 | | | 31,099 | | | 61,258 | | | 54,360 | |
| Corporate Other | 15,492 | | | 139 | | | 23,904 | | | 75 | |
| Total net revenues | $ | 1,573,885 | | | $ | 1,545,532 | | | $ | 2,922,942 | | | $ | 2,897,066 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Wholesale | $ | 948,154 | | | $ | 910,655 | | | $ | 1,739,840 | | | $ | 1,678,266 | |
| Direct-to-consumer | 577,116 | | | 603,639 | | | 1,097,940 | | | 1,164,365 | |
| Net Sales | 1,525,270 | | | 1,514,294 | | | 2,837,780 | | | 2,842,631 | |
| License revenues | 33,123 | | | 31,099 | | | 61,258 | | | 54,360 | |
| | | | | | | |
| Corporate Other | 15,492 | | | 139 | | | 23,904 | | | 75 | |
| Total net revenues | $ | 1,573,885 | | | $ | 1,545,532 | | | $ | 2,922,942 | | | $ | 2,897,066 | |
The Company records reductions to revenue for estimated customer returns, allowances, markdowns and discounts. These reserves are included within customer refund liability and the value of the inventory associated with reserves for sales returns are included within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The following table presents the customer refund liability, as well as the associated value of inventory for the periods indicated: | | | | | | | | | | | |
| As of
September 30, 2022 | | As of
March 31, 2022 |
| Customer refund liability | $ | 155,021 | | | $ | 159,628 | |
| Inventory associated with the reserves | $ | 39,968 | | | $ | 44,291 | |
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 digital fitness applications and royalty arrangements, included in other current and other long-term liabilities, and gift cards, included in accrued expenses on the Company's Condensed Consolidated Balance Sheets. As of September 30, 2022 and March 31, 2022, contract liabilities were $29.7 million and $35.3 million, respectively.
For the three and six months ended September 30, 2022, the Company recognized approximately $1.3 million and $6.1 million, respectively, of revenue that was previously included in contract liabilities as of March 31, 2022. During the three and six months ended September 30, 2021, the Company recognized
approximately $1.7 million and $6.5 million, respectively, of revenue that was previously included in contract liabilities as of March 31, 2021. The change in the contract liabilities balance primarily results from the timing differences between the Company's satisfaction of performance obligations and the customer's payment. Commissions related to subscription revenue are capitalized and recognized over the subscription period.
NOTE 12. RESTRUCTURING AND RELATED IMPAIRMENT CHARGES
During Fiscal 2020, the Company's Board of Directors approved a restructuring plan ranging between $550 million to $600 million in costs (the "2020 restructuring plan") designed to rebalance the Company's cost base to further improve profitability and cash flow generation. The Company concluded the 2020 restructuring plan during the three months ended March 31, 2022.
Restructuring and related impairment charges and recoveries require the Company to make certain judgments and estimates regarding the amount and timing as to when these charges or recoveries occur. The estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, the Company conducts an evaluation of the related liabilities and expenses and revises its assumptions and estimates as appropriate, as new or updated information becomes available. No adjustments were made during the three and six months ended September 30, 2022.
All restructuring and related impairment charges are included in the Company's Corporate Other segment. A summary of the activity in the restructuring reserve related to the Company's 2020 restructuring plan, as well as prior restructuring plans in 2018 and 2017 are as follows: | | | | | | | | | | | | | |
| Employee Related Costs | | Contract Exit Costs | | |
| Balance at March 31, 2022 | $ | 2,672 | | | $ | 78,237 | | | |
| Net additions (recoveries) charged to expense | — | | | — | | | |
| Cash payments | (1,057) | | | (73,337) | | | |
| Foreign exchange and other | (62) | | | (1,821) | | | |
| Balance at September 30, 2022 | $ | 1,553 | | | $ | 3,079 | | | |
NOTE 13. OTHER EMPLOYEE BENEFITS
The Company offers a 401(k) Deferred Compensation Plan for the benefit of eligible employees. Employee contributions are voluntary and subject to Internal Revenue Service limitations. The Company matches a portion of the participant's contribution and recorded expense for the three and six months ended September 30, 2022 of $2.6 million and $4.2 million, respectively (three and six months ended September 30, 2021: $1.7 million and $4.2 million, respectively).
In addition, the Company offers the Under Armour, Inc. Deferred Compensation Plan which allows a select group of management or highly compensated employees, as approved by the Human Capital and Compensation Committee of the Board of Directors, to make an annual base salary and/or bonus deferral for each year. As of September 30, 2022 and March 31, 2022, the Deferred Compensation Plan obligations were $11.6 million and $14.2 million, respectively, and were included in other long term liabilities on the Condensed Consolidated Balance Sheets.
The Company established a Rabbi Trust to fund obligations to participants in the Deferred Compensation Plan. As of September 30, 2022 and March 31, 2022, the assets held in the Rabbi Trust were trust owned life insurance ("TOLI") policies with cash-surrender values of $6.8 million and $8.4 million, respectively. These assets are consolidated and are included in other long term assets on the Condensed Consolidated Balance Sheets. Refer to Note 15 for a discussion of the fair value measurements of the assets held in the Rabbi Trust and the Deferred Compensation Plan obligations.
NOTE 14. STOCK BASED COMPENSATION
The Under Armour, Inc. Third Amended and Restated 2005 Omnibus Long-Term Incentive Plan as amended (the "2005 Plan") provides for the issuance of stock options, restricted stock, restricted stock units and other equity awards to officers, directors, key employees and other persons. The 2005 Plan terminates in 2029. As
of September 30, 2022, 8.3 million Class A shares and 25.2 million Class C shares are available for future grants of awards under the 2005 Plan.
Awards Granted to Employees and Non-Employee Directors
Total stock-based compensation expense associated with awards granted to employees and non-employee directors for the three and six months ended September 30, 2022 was $8.3 million and $19.7 million, respectively (three and six months ended September 30, 2021: $11.0 million and $22.6 million, respectively). As of September 30, 2022, the Company had $84.9 million of unrecognized compensation expense related to these awards expected to be recognized over a weighted average period of 2.28 years. Refer to "Stock Options" and "Restricted Stock and Restricted Stock Unit Awards" below for further information on these awards.
A summary of each of these plans is as follows:
Employee Stock Compensation Plan
Stock options, restricted stock and restricted stock unit awards under the 2005 Plan generally vest ratably over a period of two to five years. The contractual term for stock options is generally 10 years from the date of grant. The Company generally receives a tax deduction for any ordinary income recognized by a participant in respect to an award under the 2005 Plan.
Non-Employee Director Compensation Plan
The Company's Non-Employee Director Compensation Plan (the "Director Compensation Plan") provides for cash compensation and equity awards to non-employee directors of the Company under the 2005 Plan. Non-employee directors have the option to defer the value of their annual cash retainers as deferred stock units in accordance with the Under Armour, Inc. Non-Employee Deferred Stock Unit Plan (the "DSU Plan"). Each new non-employee director receives an award of restricted stock units upon the initial election to the Board of Directors, with the units covering stock valued at $100 thousand on the grant date and vesting in three equal annual installments. In addition, each non-employee director receives, following each annual stockholders' meeting, a grant under the 2005 Plan of restricted stock units covering stock valued at $150 thousand on the grant date. However, in May 2022, following the 2022 annual stockholders' meeting, each non-employee director received a grant under the 2005 plan of restricted stock units covering stock valued at $187.5 thousand to account for the Company's change in fiscal year. Each award vests 100% on the date of the next annual stockholders' meeting following the grant date.
The receipt of the shares otherwise deliverable upon vesting of the restricted stock units automatically defers into deferred stock units under the DSU Plan. Under the DSU Plan each deferred stock unit represents the Company’s obligation to issue one share of the Company's Class A or Class C Common Stock with the shares delivered six months following the termination of the director's service. The Company had 0.8 million deferred stock units outstanding as of September 30, 2022.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "ESPP") allows for the purchase of Class A Common Stock and Class C Common Stock by all eligible employees at a 15% discount from fair market value subject to certain limits as defined in the ESPP. As of September 30, 2022, 2.7 million Class A shares and 1.4 million Class C shares are available for future purchases under the ESPP. During the three and six months ended September 30, 2022, 171.6 thousand and 293.0 thousand Class C shares were purchased under the ESPP, respectively (three and six months ended September 30, 2021: 58.0 thousand and 118.9 thousand, respectively).
Awards granted to Marketing Partners
In addition to the plans discussed above, the Company may also, from time to time, issue deferred stock units or restricted stock units to certain of our marketing partners in connection with their entering into endorsement and other marketing services agreements with us. The terms of each agreement set forth the number of units to be granted and the delivery dates for the shares, which range over a multi-year period, depending on the contract.
Total stock-based compensation expense related to these awards for the three and six months ended September 30, 2022 was $0.8 million and $1.7 million, respectively (three and six months ended September 30, 2021: $0.9 million and $1.8 million, respectively). As of September 30, 2022, we had $6.0 million of unrecognized compensation expense associated with these awards expected to be recognized over a weighted average period of 2.07 years.
Summary by Award Classification:
Stock Options
A summary of the Company's stock options activity for the six months ended September 30, 2022 is presented below: | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Total Intrinsic Value |
| Outstanding at March 31, 2022 | 1,578 | | | $ | 19.44 | | | 5.82 | | $ | 217 | |
| Granted, at fair market value | — | | | — | | | — | | | — | |
| Exercised | — | | | — | | | — | | | — | |
| Forfeited | — | | | — | | | — | | | — | |
| Outstanding at September 30, 2022 | 1,578 | | | $ | 19.44 | | | 5.32 | | $ | — | |
| Options exercisable at September 30, 2022 | 1,369 | | | $ | 19.92 | | | 5.06 | | $ | — | |
Restricted Stock and Restricted Stock Unit Awards
A summary of the Company's restricted stock and restricted stock unit awards activity for the six months ended September 30, 2022 is presented below:
| | | | | | | | | | | |
| Number of Restricted Shares | | Weighted Average Grant Date Fair Value |
| Outstanding at March 31, 2022 | 7,807 | | | $ | 16.57 | |
| Granted | 1,997 | | | 9.14 | |
| Forfeited | (1,486) | | | 15.52 | |
| Vested | (409) | | | 16.73 | |
| Outstanding at September 30, 2022 | 7,909 | | | $ | 14.88 | |
Included in the table above are 1.2 million performance-based restricted stock units awarded to certain executives and key employees under the 2005 Plan during the three months ended June 30, 2022. The performance-based restricted stock units awarded have a weighted average fair value of $9.13 and have vesting that is tied to the achievement of certain combined annual revenue and operating income targets. During the three and six months ended September 30, 2022, the Company deemed the achievement of these targets probable and recorded $0.9 million and $1.3 million, respectively, of compensation expense related to these awards.
NOTE 15. 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. |
The Company's financial assets and (liabilities) measured at fair value are set forth inon a recurring basis consisted of the table below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| Derivative foreign currency contracts (see Note 8) | |
|
| | (7,754 | ) | |
|
| | — |
| | 15,238 |
| | — |
| | — |
| | 1,577 |
| | — |
|
| Interest rate swap contracts (see Note 8) | | — |
| | 156 |
| | — |
| | — |
| | (420 | ) | | — |
| | — |
| | 3,953 |
| | — |
|
| TOLI policies held by the Rabbi Trust | | — |
| | 5,539 |
| | — |
| | — |
| | 4,880 |
| | — |
| | — |
| | 4,819 |
| | — |
|
| Deferred Compensation Plan obligations | | — |
| | (9,301 | ) | | — |
| | — |
| | (7,023 | ) | | — |
| | — |
| | (6,486 | ) | | — |
|
following types of instruments as of the following periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | March 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| Derivative foreign currency contracts (see Note 16) | $ | — | | | $ | 104,954 | | | $ | — | | | $ | — | | | $ | 988 | | | $ | — | |
| TOLI policies held by the Rabbi Trust (see Note 13) | $ | — | | | $ | 6,820 | | | $ | — | | | $ | — | | | $ | 8,379 | | | $ | — | |
| Deferred Compensation Plan obligations (see Note 13) | $ | — | | | $ | (11,649) | | | $ | — | | | $ | — | | | $ | (14,230) | | | $ | — | |
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’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”)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"Deferred Compensation Plan”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’participants' selected investments.
As of September 30, 2017, the fair value of the Company's Senior Notes was $557.3 million, and as of September 30, 2016, the carrying value approximated the fair value. The carrying value of the Company's other long term debt approximated its fair value as of September 30, 2017 and 2016. The fair value of long-termlong term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2).
SomeAs of September 30, 2022 and March 31, 2022, the fair value of the Convertible Senior Noteswas $78.5 million and $126.6 million, respectively.
As of September 30, 2022 and March 31, 2022, the fair value of the Senior Notes was $519.2 million and $580.0 million, respectively.
Certain assets are not measured atremeasured to 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.
7. Performance Based Equity CompensationNOTE 16. RISK MANAGEMENT AND DERIVATIVES
The Company grants a combinationis exposed to global market risks, including the effects of time-basedchanges in foreign currency and performance-based restricted stock unitsinterest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business and stock optionsdoes not hold or issue derivatives for trading or speculative purposes.
The Company may elect to designate certain derivatives as part ofhedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its incentive compensation. Certain senior executives are eligiblerisk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to receive performance-based awards. Duringforecasted cash flows and assessing, both at inception and on an ongoing basis, the nine months ended September 30, 2017, 1.8 million performance-based restricted stock units and 0.5 million performance-based stock options for shares of our Class C common stock were awarded under the Company's Second Amended and Restated 2005 Omnibus Long-Term Incentive Plan, as amended. The performance-based restricted stock units and options have weighted average grant date fair values of $19.05 and $8.17, respectively, and have vesting conditions tied to the achievement of certain combined revenue and operating income targets for 2017 and 2018. Upon the achievementeffectiveness of the targets, one halfhedging relationships.
The Company's foreign exchange risk management program consists of the restricted stock unitsdesignated cash flow hedges and options will vest each in February 2019 and February 2020.
If certain lower levels of combined annual revenue and operating income for 2017 and 2018 are achieved, fewer or no restricted stock units or options will vest and the remaining restricted stock units and options will be forfeited. The Company deemed the achievement of certain revenue and operating income targets for 2017 and 2018 probable during the nine months ended September 30, 2017. The Company assesses the probability of the achievement of the remaining revenue and operating income targets at the end of each reporting period. If it becomes probable that any remaining performance targets related to these performance-based restricted stock units and options will be achieved, a cumulative adjustment will be recorded as if ratable stock-based compensation expense had been recorded since the grant date. Additional stock based compensation of up to $4.2 million would have been recorded during the nine months ended September 30, 2017, for these performance-based restricted stock units and options had the achievement of the remaining revenue and operating income targets been deemed probable.
During 2016, the Company granted performance-based restricted stock units and options with vesting conditions tied to the achievement of certain combined annual operating income targets for 2016 and 2017.undesignated hedges. As of September 30, 2017,2022, the Company deemshas hedge instruments primarily for:
•British Pound/U.S. Dollar;
•U.S. Dollar/Chinese Renminbi;
•Euro/U.S. Dollar;
•U.S. Dollar/Canadian Dollar;
•U.S. Dollar/Mexican Peso; and
•U.S. Dollar/Korean Won.
All derivatives are recognized on the achievementCondensed 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 Condensed Consolidated Balance Sheets. Refer to Note 15 of the Condensed Consolidated Financial Statements for a discussion of the fair value measurements.
| | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet Classification | | September 30, 2022 | | March 31, 2022 |
| Derivatives designated as hedging instruments under ASC 815 | | | | |
| Foreign currency contracts | | Other current assets | | $ | 86,361 | | | $ | 11,561 | |
| Foreign currency contracts | | Other long term assets | | 28,612 | | | 2,730 | |
| Total derivative assets designated as hedging instruments | | $ | 114,973 | | | $ | 14,291 | |
| | | | | | |
| Foreign currency contracts | | Other current liabilities | | $ | 2,994 | | | $ | 11,209 | |
| Foreign currency contracts | | Other long term liabilities | | 649 | | | 3,645 | |
| Total derivative liabilities designated as hedging instruments | | $ | 3,643 | | | $ | 14,854 | |
| | | | | | |
| Derivatives not designated as hedging instruments under ASC 815 | | | | |
| Foreign currency contracts | | Other current assets | | $ | 13,074 | | | $ | 4,412 | |
| Total derivative assets not designated as hedging instruments | | $ | 13,074 | | | $ | 4,412 | |
| | | | | | |
| Foreign currency contracts | | Other current liabilities | | $ | 1,797 | | | $ | 1,213 | |
| Total derivative liabilities not designated as hedging instruments | | $ | 1,797 | | | $ | 1,213 | |
The following table presents the amounts in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these operating income targets improbable. As such, no expense forline items: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Six months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| 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 | $ | 1,573,885 | | | $ | 13,697 | | | $ | 1,545,532 | | | $ | (1,953) | | | $ | 2,922,942 | | | $ | 20,251 | | | $ | 2,897,066 | | | $ | (4,330) | |
| Cost of goods sold | $ | 860,051 | | | $ | (891) | | | $ | 757,428 | | | $ | (3,947) | | | $ | 1,578,911 | | | $ | (2,839) | | | $ | 1,440,141 | | | $ | (6,368) | |
| Interest income (expense), net | $ | (3,555) | | | $ | (9) | | | $ | (9,261) | | | $ | (9) | | | $ | (9,560) | | | $ | (18) | | | $ | (22,568) | | | $ | (18) | |
| Other income (expense), net | $ | (5,771) | | | $ | — | | | $ | (29,476) | | | $ | — | | | $ | (20,012) | | | $ | — | | | $ | (67,970) | | | $ | — | |
The following tables present the amounts affecting the Condensed Consolidated Statements of Comprehensive Income (Loss):
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of
June 30, 2022 | | 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, 2022 |
| Derivatives designated as cash flow hedges | | | | | | |
| Foreign currency contracts | $ | 51,693 | | | $ | 73,116 | | | $ | 12,806 | | | $ | 112,003 | |
| Interest rate swaps | (486) | | | — | | | (9) | | | (477) | |
| Total designated as cash flow hedges | $ | 51,207 | | | $ | 73,116 | | | $ | 12,797 | | | $ | 111,526 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of
March 31, 2022 | | 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, 2022 |
| Derivatives designated as cash flow hedges | | | | | | |
| Foreign currency contracts | $ | 41 | | | $ | 129,374 | | | $ | 17,412 | | | $ | 112,003 | |
| Interest rate swaps | (495) | | | — | | | (18) | | | $ | (477) | |
| Total designated as cash flow hedges | $ | (454) | | | $ | 129,374 | | | $ | 17,394 | | | $ | 111,526 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of
June 30, 2021 | | 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, 2021 |
| Derivatives designated as cash flow hedges | | | | | | |
| Foreign currency contracts | $ | (20,346) | | | $ | 14,459 | | | $ | (5,900) | | | $ | 13 | |
| Interest rate swaps | (522) | | | — | | | (9) | | | (513) | |
| Total designated as cash flow hedges | $ | (20,868) | | | $ | 14,459 | | | $ | (5,909) | | | $ | (500) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of
March 31, 2021 | | 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, 2021 |
| Derivatives designated as cash flow hedges | | | | | | |
| Foreign currency contracts | $ | (15,886) | | | $ | 5,202 | | | $ | (10,697) | | | $ | 13 | |
| Interest rate swaps | (531) | | | — | | | (18) | | | (513) | |
| Total designated as cash flow hedges | $ | (16,417) | | | $ | 5,202 | | | $ | (10,715) | | | $ | (500) | |
The following table presents the amounts in the Condensed 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, | | Six months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| 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 income (expense), net | $ | (5,771) | | $ | (849) | | | $ | (29,476) | | $ | (2,382) | | | $ | (20,012) | | | $ | (4,851) | | | $ | (67,970) | | | $ | (460) | |
Cash Flow Hedges
8. Risk Management and Derivatives
Foreign Currency Risk Management
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions generated by its international subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by intercompany transactions 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, 2017,2022 and March 31, 2022 the aggregate notional value of the Company's outstanding foreign currency contractscash flow hedges was $338.6$1,262.5 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$1,096.5 million, respectively, with contract maturities ranging from one to fourteentwenty-four months. A portion of the Company's foreign currency contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings.
The Company 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, the effective portion of the changes in their fair value are recorded in other comprehensive income and reclassified into interest expense over the life of the underlying debt obligation. Refer to Note 48 of the Condensed Consolidated Financial Statements for a discussion of long term debt.
For contracts designated as cash flow hedges, the changes in fair value are reported as other comprehensive income (loss) and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Effective hedge results are classified in the Condensed Consolidated Statements of Operations in the same manner as the underlying exposure.
Undesignated Derivative Instruments
The Company has entered into foreign exchange forward contracts to mitigate the change in fair value of specific assets and liabilities on the Condensed Consolidated Balance Sheets. Undesignated instruments are recorded at fair value as a derivative asset or liability on the Condensed 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, 2017,2022 and March 31, 2022, the total notional value of the Company's outstanding interest rate swap contractsundesignated derivative instruments was $140.0 million. During the three months ended September 30, 2017 and 2016, the Company recorded a $0.2$341.8 million and $0.5$228.4 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.respectively.
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.
NOTE 17. PROVISION FOR INCOME TAXES
9. ProvisionThe Company computes its quarterly income tax provision under the effective tax rate method by applying an estimated anticipated annual effective rate to our year-to-date income, except for significant and unusual or extraordinary transactions. Losses from jurisdictions for which no benefit can be recognized are excluded from the overall computations of the estimated annual effective tax rate and a separate estimated annual effective tax rate is computed and applied to ordinary income or loss in the loss jurisdiction. Income Taxestaxes for any significant and unusual or extraordinary transactions are computed and recorded in the period in which the specific transaction occurs.
ProvisionThe effective rates for income taxes decreased $81.6 million to a benefit of $1.3 million duringwere 20.2% and 14.2% for the ninethree months ended September 30, 2017 from $80.3 million during2022 and 2021, respectively. The change in the sameCompany’s effective tax rate was primarily driven by the proportion of foreign earnings subject to tax and related valuation allowances in each period, as well as one time discrete benefits recorded in 2016. For the ninethree months ended September 30, 2017,2021.
The effective rates for income taxes were 22.4% and 14.3% for the Company'ssix months ended September 30, 2022 and 2021, respectively. The change in the Company’s effective tax rate was (3.5%) comparedprimarily driven by the proportion of foreign earnings subject to 34.3% fortax and related valuation allowances in each period, as well as one time discrete benefits recorded in the same period in 2016. The effective tax rate for the ninesix months ended September 30, 2017 was lower than the effective tax rate for the nine months ended September 30, 2016 primarily due to challenged results in North America creating a higher proportion of international profits in 2017, partially offset by non-deductible goodwill impairment charges and the recording of certain valuation allowances.2021.
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 wereare established against the Company's deferred tax assets, which increase income tax expense in the period when such a determination is made.
As noted in the Company's Annual Report on Form 10-K for Fiscal 2021, a significant portion of the Company’s deferred tax assets relate to United States federal and state taxing jurisdictions. Realization of these deferred tax assets is dependent on future United States pre-tax earnings. As of September 30, 2022, the Company continues to believe that the weight of the negative evidence outweighs the positive evidence regarding the realization of the Company’s United States federal and the majority of the United States state deferred tax assets. Accordingly, the Company continues to maintain a valuation allowance on these deferred tax assets. Furthermore, consistent with prior periods, valuation allowances have also been recorded against current yeara portion of foreign deferred tax assets in certain U.S. state jurisdictions. These valuation allowances were recorded due to lower than expected results injurisdictions where the third quarterweight of 2017negative evidence outweighs the positive evidence regarding the realization of deferred tax assets.
As of each reporting date, management considers new evidence, both positive and a significantly reduced outlooknegative, that could affect its view of the future realization of deferred tax assets. The Company's current forecast for the remainder of the year.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions which are regularly subject to examination by tax authorities. Based on the status of current examinations in various taxing jurisdictions, management believesUnited States indicates that it is reasonably possible that additional deferred taxes could be realizable during the current fiscal year-end based on near term trend towards three-year cumulative taxable earnings. The actualization of these forecasted results may potentially outweigh the negative evidence, resulting in a reversal of all or a portion of previously recorded valuation allowances in the next 12 monthsUnited States. The release of valuation allowances would result in a benefit to income tax expense in the period the release is recorded, which could have a material impact on net income. The timing and amount of the total liability for unrecognized incomepotential valuation allowance release are subject to significant management judgment, as well as prospective pre-tax earnings in the United States. The Company will continue to evaluate its ability to realize its net deferred tax benefits and interest could decrease by up to $16 million.assets on a quarterly basis.
10. Earnings per ShareNOTE 18. 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, | | Six Months Ended September 30, |
| 2022 | | 2021(1) | | 2022 | | 2021(1) |
| Numerator | | | | | | | |
| Net income (loss) - Basic | $ | 86,925 | | | $ | 113,444 | | | $ | 94,607 | | | $ | 172,651 | |
Interest on Convertible Senior Notes due 2024, net of tax (2) | 225 | | | — | | | 449 | | | — | |
| Net income (loss) - Diluted | $ | 87,150 | | | $ | 113,444 | | | $ | 95,056 | | | $ | 172,651 | |
| Denominator | | | | | | | |
| Weighted average common shares outstanding Class A, B and C - Basic | 454,322 | | | 470,002 | | | 456,357 | | | 464,831 | |
Dilutive effect of Class A, B, and C securities (2) | 1,577 | | | 3,114 | | | 1,544 | | | 2,899 | |
Dilutive effect of Convertible Senior Notes due 2024 (2) | 8,242 | | | — | | | 8,242 | | | — | |
| Weighted average common shares and dilutive securities outstanding Class A, B, and C | 464,141 | | | 473,116 | | | 466,143 | | | 467,730 | |
| | | | | | | |
Class A and Class C securities excluded as anti-dilutive (3) | 7,712 | | | 458 | | | 8,085 | | | 782 | |
| | | | | | | |
| Basic net income (loss) per share of Class A, B and C common stock | $ | 0.19 | | | $ | 0.24 | | | $ | 0.21 | | | $ | 0.37 | |
| Diluted net income (loss) per share of Class A, B and C common stock | $ | 0.19 | | | $ | 0.24 | | | $ | 0.20 | | | $ | 0.37 | |
(1) The Company adopted Accounting Standard Update No. 2020-06 "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)" (ASU 2020-06) on January 1, 2022 using the modified retrospective transition approach. As a result, prior period comparatives have not been restated to conform to current period presentation. |
| | | | | | | | | | | | | | | |
| | 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 |
|
(2) Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock
(3) Represents stock options and restricted stock units representing 233.8 thousand and 83.7 thousand shares of Class A common stockand Class C Common Stock outstanding for the three months ended September 30, 2017 and 2016, respectively,that were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Stock options and restricted stock units representing 4.0 million and 1.1 million shares of Class C common stock outstanding for the three months ended September 30, 2017 and 2016, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Stock options and restricted stock units representing 272.3 thousand and 86.9 thousand shares of Class A common stock outstanding for the nine months ended September 30, 2017 and 2016, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Stock options and restricted stock units representing 4.1 million and 0.4 million shares of Class C common
stock outstanding for the nine months ended September 30, 2017 and 2016, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
11. Segment Data and Related InformationNOTE 19. SEGMENT DATA
The Company’sCompany's operating segments are based on how the Chief Operating Decision Maker (“CODM”("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’sCompany's strategy to becomeof being a global brand. These geographic regions include North America, Latin America, Europe, the Middle East and Africa (“EMEA”("EMEA"), Asia-Pacific, and Asia-Pacific.Latin America. Each geographic segment operates exclusively in one industry: the development, marketing and distribution of branded performance apparel, footwear and accessories. The CODM also receives discrete financial information for the Company's Connected Fitness business. Total expenditures for additions to long-lived assets are not disclosed as this information is not regularly provided to the CODM.
The Company excludes certain corporate costs from its segment profitability measures. The Company reports these costs within Corporate Other, along with the revenue and costs related to the Company's MapMyRun and MapMyRide platforms (collectively "MMR") and other digital business opportunities, which is designed to provide increased transparency and comparability of the Company's operating segments' performance. Furthermore, the majority of the costs included within Corporate Other consist 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, such as restructuring charges; and certain foreign currency hedge gains and losses.
The following tables summarize the Company's 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.by its geographic segments. Intercompany balances were eliminated for separate disclosure. The majoritydisclosure: | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net revenues | | | | | | | |
| North America | $ | 1,011,823 | | | $ | 1,035,862 | | | $ | 1,921,179 | | | $ | 1,941,355 | |
| EMEA | 262,679 | | | 241,201 | | | 467,860 | | | 448,425 | |
| Asia-Pacific | 225,729 | | | 211,950 | | | 402,394 | | | 404,319 | |
| Latin America | 58,162 | | | 56,380 | | | 107,605 | | | 102,892 | |
| Corporate Other | 15,492 | | | 139 | | | 23,904 | | | 75 | |
| Total net revenues | $ | 1,573,885 | | | $ | 1,545,532 | | | $ | 2,922,942 | | | $ | 2,897,066 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Operating income (loss) | | | | | | | |
| North America | $ | 209,206 | | | $ | 292,367 | | | $ | 399,130 | | | $ | 518,136 | |
| EMEA | 35,895 | | | 41,772 | | | 54,076 | | | 81,664 | |
| Asia-Pacific | 46,134 | | | 40,529 | | | 66,079 | | | 64,575 | |
| Latin America | 7,177 | | | 10,831 | | | 13,411 | | | 16,832 | |
| Corporate Other | (179,002) | | | (213,435) | | | (378,803) | | | (387,938) | |
| Total operating income (loss) | 119,410 | | | 172,064 | | | 153,893 | | | 293,269 | |
| Interest expense, net | (3,555) | | | (9,261) | | | (9,560) | | | (22,568) | |
| Other income (expense), net | (5,771) | | | (29,476) | | | (20,012) | | | (67,970) | |
| Income (loss) before income taxes | $ | 110,084 | | | $ | 133,327 | | | $ | 124,321 | | | $ | 202,731 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Net revenues | | | | | | | |
| North America | $ | 1,077,088 |
| | $ | 1,225,188 |
| | $ | 2,778,165 |
| | $ | 2,932,915 |
|
| EMEA | 127,932 |
| | 105,099 |
| | 334,683 |
| | 237,559 |
|
| Asia-Pacific | 130,320 |
| | 85,810 |
| | 309,712 |
| | 188,985 |
|
| Latin America | 46,887 |
| | 35,295 |
| | 123,342 |
| | 99,170 |
|
| Connected Fitness | 23,388 |
| | 20,181 |
| | 65,290 |
| | 62,179 |
|
| Intersegment eliminations | — |
| | — |
| | — |
| | (750 | ) |
| Total net revenues | $ | 1,405,615 |
| | $ | 1,471,573 |
| | $ | 3,611,192 |
| | $ | 3,520,058 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| Nine Months Ended September 30, |
| (In thousands) | 2017 |
| 2016 |
| 2017 |
| 2016 |
| Operating income |
|
|
|
|
|
|
|
| North America | $ | 65,827 |
|
| $ | 182,840 |
|
| $ | 64,124 |
|
| $ | 251,084 |
|
| EMEA | 16,977 |
|
| 8,383 |
|
| 13,990 |
|
| 8,348 |
|
| Asia-Pacific | 34,173 |
|
| 27,151 |
|
| 69,050 |
|
| 54,399 |
|
| Latin America | (10,223 | ) |
| (10,550 | ) |
| (26,175 | ) |
| (27,751 | ) |
| Connected Fitness | (44,574 | ) |
| (8,514 | ) |
| (56,058 | ) |
| (32,509 | ) |
| Total operating income | 62,180 |
|
| 199,310 |
|
| 64,931 |
|
| 253,571 |
|
| Interest expense, net | (9,575 | ) |
| (8,189 | ) |
| (25,237 | ) |
| (18,476 | ) |
| Other expense, net | (1,069 | ) |
| (772 | ) |
| (1,383 | ) |
| (1,025 | ) |
| Income before income taxes | $ | 51,536 |
|
| $ | 190,349 |
|
| $ | 38,311 |
|
| $ | 234,070 |
|
The operating income information presented above includes the impact of restructuring and impairment charges related to the Company's restructuring plan. Charges incurred and expected to be incurred by segment in connection with the restructuring plan are as follows:
|
| | | | | | | | | | | | | | | | |
| | Costs Incurred | Estimated Costs to be Incurred |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended December 31, | | Total | |
| (In thousands) | 2017 (1) | | 2017 (1) | | 2017 (1) | | 2017 | |
| Costs recorded in restructuring and impairment charges: | | | | | | | | |
| North America | $ | 30,965 |
| | $ | 33,563 |
| | $ | 49,000 |
| | $ | 82,563 |
| |
| EMEA | 184 |
| | 184 |
| | 8,000 |
| | 8,184 |
| |
| Asia-Pacific | — |
| | — |
| | — |
| | — |
| |
| Latin America | 6,039 |
| | 6,540 |
| | — |
| | 6,540 |
| |
| Connected Fitness | 47,810 |
| | 47,810 |
| | — |
| | 47,810 |
| |
| Total costs recorded in restructuring and impairment charges | $ | 84,998 |
| | $ | 88,097 |
| | $ | 57,000 |
| | $ | 145,097 |
| |
(1) This table excludes additional non-cash charges of $3.6 million for the three and nine months ended September 30, 2017 associated with the reduction of inventory outside of current liquidation channels in line with the restructuring plan.
Net revenues by product category are as follows: |
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Net Revenues | | | | | | | |
| Apparel | $ | 939,364 |
| | $ | 1,021,185 |
| | $ | 2,335,454 |
| | $ | 2,300,596 |
|
| Footwear | 285,052 |
| | 278,891 |
| | 791,637 |
| | 785,843 |
|
| Accessories | 123,487 |
| | 121,832 |
| | 335,172 |
| | 302,267 |
|
| Total net sales | 1,347,903 |
| | 1,421,908 |
| | 3,462,263 |
| | 3,388,706 |
|
| License revenues | 34,324 |
| | 29,484 |
| | 83,639 |
| | 69,923 |
|
| Connected Fitness | 23,388 |
| | 20,181 |
| | 65,290 |
| | 62,179 |
|
| Intersegment eliminations | — |
| | — |
| | — |
| | (750 | ) |
| Total net revenues | $ | 1,405,615 |
| | $ | 1,471,573 |
| | $ | 3,611,192 |
| | $ | 3,520,058 |
|
ITEM 2. MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help readers understand our results of operations and financial condition, and is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying Notes to our Condensed Consolidated Financial Statements under Part I, Item 1 of this Quarterly Report on Form 10-Q, in our Transition Report on Form 10-QT for the three months ended March 31, 2022, filed with the SEC on May 9, 2022, and in our Annual Report on Form 10-K for Fiscal 2021, filed with the Securities Exchange Commission ("SEC") on February 23, 2022, under the captions "Business" and "Risk Factors".
This Quarterly Report on Form 10-Q, including this MD&A, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the U.S. Securities Act of 1933, as amended ("the Securities Act"), and is subject to the safe harbors created by those sections. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. See "Forward Looking Statements." Forward-Looking StatementsAll dollar and percentage comparisons made herein refer to the three and six months ended September 30, 2022 compared with the three and six months ended September 30, 2021, unless otherwise noted.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Form 10-Q, including this MD&A, 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 share repurchase program, our future financial condition or results of operations, our prospects and strategies for future growth, the impact of the COVID-19 pandemic on our anticipated chargesbusiness and restructuring costsresults of operations and the timingoperations of these measures,our suppliers and logistics providers, expectations regarding promotional activities, freight, product cost pressures and foreign currency impacts, the impact of inflation on our results of operations, the development and introduction of new products, the implementation of our marketing and branding strategies, and the 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”"may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "outlook," "potential" or the negative of these terms or other comparable terminology.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 "Risk Factors" and MD&A herein and in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC”) (our “2016 Form 10-K”) or in this Form 10-Q under “Risk Factors”, if included herein, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”Fiscal 2021. These factors include without limitation:limitation:
•the impact of the COVID-19 pandemic on our industry and our business, financial condition and results of operations, including recent impacts on the global supply chain;
•changes in general economic or market conditions, including increasing inflation, that could affect overall consumer spending or our industry;
changes to the financial health•failure of our customers;
our abilitysuppliers, manufacturers or logistics providers to successfully execute our restructuring plan and realize its expected benefits;
our ability to effectively drive operational efficiency in our business;
any disruptions, delaysproduce or deficiencies in the design or implementation of our new global operating and financial reporting information technology system;
our ability to effectively manage our growth and a more complex global business;
our ability to comply with existing trade and other regulations, and the potential impact of new trade and tax regulations on our profitability;
our ability to successfully manage or realize expected results from acquisitions and other significant investments or capital expenditures;
our ability to effectively develop and launch new, innovative and updated products;
fluctuations in the costs of our products;
our ability to accurately forecast consumer demand fordeliver our products and managein a timely or cost-effective manner;
•labor or other disruptions at ports or our inventory in response to changing demands;suppliers or manufacturers;
•increased competition causing us to lose market share or reduce the prices of our products or to increase significantly our marketing efforts;efforts significantly;
•fluctuations in the costs of raw materials and commodities we use in our products and our supply chain (including labor);
•changes to the financial health of our customers;
•our ability to successfully execute our long-term strategies;
•our ability to effectively drive operational efficiency in our business and realize expected benefits from restructuring plans;
•our ability to effectively develop and launch new, innovative and updated products;
•our ability to accurately forecast consumer shopping and engagement preferences and consumer demand for our products and manage our inventory in response to changing demands;
•loss of key customers, suppliers or manufacturers or failure of our suppliers or manufacturers to produce or deliver our products in a timely or cost-effective manner, including due to port disruptions;manufacturers;
•our ability to further expand our business globally and to drive brand awareness and consumer acceptance of our products in other countries;
•our ability to manage the increasingly complex operations of our global business;
•the impact of global events beyond our control, including military conflict;
•our ability to successfully manage or realize expected results from significant transactions and investments;
•our ability to effectively market and maintain a positive brand image;
•our ability to effectively meet the expectations of our stakeholders with respect to environmental, social and governance practices;
•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 totechnology;
•any disruptions, delays or deficiencies in the design, implementation or application of our new global operating and financial reporting information technology system;
•our ability to attract key talent and retain the services of our senior management and other key employees;
•our ability to access capital and financing required to manage our business on terms acceptable to us;
•our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;
•risks related to foreign currency exchange rate fluctuations;
•our ability to effectively marketcomply with existing trade and maintain a positive brand image;other regulations, and the potential impact of new trade, tariff and tax regulations on our profitability;
•risks related to data security or privacy breaches; and
our ability to raise additional capital required to grow our business on terms acceptable to us;
•our potential exposure to litigation and other proceedings; andproceedings.
our ability to attract key talent and retain the services of senior management and key employees.
The forward-looking statements contained in this Form 10-Q reflect our views and assumptions only as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.events.
OverviewOVERVIEW
We are a leading developer, marketer, and distributor of branded performance apparel, footwear, and accessories. The brand’sOur brand's moisture-wicking fabrications are engineered in many differentvarious 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 asand by consumers with active lifestyles. The Under Armour Connected Fitness platform powers the world's largest digital health
Strategically and fitness community and our strategy isoperationally, we remain focused on engaging with these consumersdriving premium brand-right growth and increasing awareness and sales ofimproved profitability. Over the long term, our products. We plan to grow this community by developing innovative applications, services and other digital solutions to impact how athletes and fitness-minded individuals train, perform and live.
Our net revenues grew to $4,825.3 million in 2016 from $1,834.9 million in 2012. We believe that our growth in net revenues has been driven by increasing consumer interest in our products and the strength of the Under Armour brand in the market place. Our long-term growth strategy is predicated on delivering industry-leading product innovation; sustained demand for our products; return-driven investments focused on increased salesconnecting with our consumers through marketing activations and premium experiences; and the expansion of our products throughdirect-to-consumer and international businesses.
During the three months ended September 30, 2022, we faced a challenging retail environment that included increased promotions and discounting, elevated freight expenses, ongoing product innovation, investmentCOVID-19 related impacts in our distribution channels, international expansionChina and engaging with consumers through our Connected Fitness business. While we plan to continue to investfurther negative impacts from changes 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.foreign currency rates.
Quarterly Results
Financial highlights for the three months ended September 30, 20172022 as compared to the prior year periodthree months ended September 30, 2021 include:
Net•Total net revenues decreased 4.5%increased 1.8%.
Wholesale•Within our channels, wholesale revenue increased 4.1% and direct-to-consumer revenue decreased 13.2% and Direct to Consumer4.4%.
•Within our product categories, apparel revenue decreased 1.9%, footwear revenue increased 14.6%.
Apparel14.0%, and accessories revenue decreased8.0% 12.1%. Footwear and accessories revenues grew 2.2% and 1.4%, respectively.
Revenue•Net revenue decreased 2.3% in our North America, segmentincreased 8.9% in EMEA, increased 6.5% in Asia-Pacific, and increased 3.2% in Latin America.
•Gross margin decreased 12.1%560 basis points to 45.4%. Revenue in our Asia-Pacific, EMEA and Latin America segments grew 51.9%, 21.7% and 32.8%, respectively.
•Selling, general and administrative expenseexpenses decreased 0.2%0.8%.
Gross margin decreased 160 basis points.COVID-19 Update
On July 27, 2017,The COVID-19 pandemic has caused, and we expect will continue to cause, disruption and volatility in our Boardbusiness and in the businesses of Directors approved a restructuring plan (the “restructuring plan”)our wholesale customers, licensing partners, suppliers, logistics providers and vendors.
For instance, the COVID-19 pandemic has caused global logistical challenges, including increased freight costs, shipping container shortages, transportation delays, labor shortages and port congestion. These challenges have disrupted some of our normal inbound and outbound inventory flow, which has required us to more closely alignincur increased freight costs, and caused us to make strategic decisions working with certain of our vendors and customers to cancel orders affected by capacity issues and supply chain delays. During the three months ended September 30, 2022, the pandemic continued to cause temporary closures and placed certain restrictions on our Brand and Factory House stores and distribution centers in China. We expect these challenges and related impacts to negatively impact our financial resources with our critical prioritiesresults in Fiscal 2023.
Moreover, governments worldwide continue to periodically impose preventative and protective actions, such as temporary travel bans, forced business closures, and stay-at-home orders, all in an effort to reduce the spread of the business. virus. Ongoing impacts of the COVID-19 pandemic and related preventative and protective actions in China during the three months ended September 30, 2022 have negatively impacted consumer traffic and demand and may continue to negatively impact our financial results. However, such government measures are not implemented consistently or simultaneously around the world, thus making our business susceptible to volatility on a global and regional basis. We believe we may continue to experience varying degrees of volatility, business disruptions and periods of closure of our stores, distribution centers and corporate facilities. Although, as of September 30, 2022, substantially all of our Brand and Factory House stores and the stores of our wholesale customers were open, some of these retail stores in China were operating with restrictive and precautionary measures in place such as reduced operating hours, physical distancing, enhanced cleaning and sanitation, and limited occupancy levels.
The COVID-19 pandemic and related disruptions across the global supply chain and retail environment, remains a risk that could have material adverse impacts to our future revenue growth as well as to our overall profitability. The extent of the impact of the COVID-19 pandemic on our operational and financial performance depends on future developments that are outside of our control. For a more complete discussion of the COVID-19 related risks facing our business, refer to our "Risk Factors" section included in Item 1A of our Annual Report on Form 10-K for Fiscal 2021.
Effects of Inflation and Other Global Events
Our original expectation wasbusiness could be impacted by continued or increasing inflation in key global markets, including the United States and Europe, and fluctuations in foreign currency exchange rates. In March 2022, we announced our decision to incur estimated pre-taxno longer ship our products for sale in Russia as a result of the ongoing conflict with Ukraine. We do not believe this will have a material impact on our revenues. However, we continue to monitor the broader impacts of the Russia Ukraine conflict on the global economy, including its effect on inflationary pressures and the price of oil globally. See "Risk Factors—Economic and Industry Risks—Our business depends on consumer purchases of discretionary items, which can be negatively impacted during an economic downturn or periods of inflation. This could materially harm our sales, profitability and financial condition"; "—Fluctuations in the cost of raw materials and commodities we use in our products and costs related to our supply chain could negatively affect our operating results"; "—Our financial results and ability to grow our business may be negatively impacted by global events
beyond our control"; and "—Financial Risks—Our financial results could be adversely impacted by currency exchange rate fluctuations" included in Item 1A of our Annual Report on Form 10-K for Fiscal 2021.
Segment Presentation and Marketing
Corporate Other consists primarily of revenue and costs related to our MapMyRun and MapMyRide platforms (collectively "MMR") and other digital business opportunities, as well as general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain, innovation, and other corporate support functions; costs related to our global assets and global marketing, costs related to our headquarters; restructuring and impairment related charges of approximately $110.0charges; and certain foreign currency hedge gains and losses.
Fiscal Year End Change
As previously disclosed, we changed our fiscal year end from December 31 to $130.0 millionMarch 31, effective for the fiscal year ended Decemberbeginning April 1, 2022. Our current fiscal year will run from April 1, 2022 through March 31, 2017. In the third quarter2023 (Fiscal 2023). Consequently, there was no Fiscal 2022.
RESULTS OF OPERATIONS
The following tables set forth key components of 2017, we recognized approximately $59.9 millionour results of pre-tax charges in connection with this restructuring plan, which included $31.2 million of asset impairments and $28.7 million of restructuring related charges including employee related severance, contract terminations and other restructuring related costs. In addition to these charges, we also recognized restructuring related goodwill impairment charges of approximately $28.6 million for our Connected Fitness business which was not included our original range estimate. Inclusive of the goodwill impairment, we now expect to incur total pre-tax restructuring and related charges of approximately $140.0 to $150.0 millionoperations for the year ending December 31, 2017.periods indicated, both in dollars and as a percentage of net revenues: | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Six months ended September 30, |
| (In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| Net revenues | $ | 1,573,885 | | | $ | 1,545,532 | | | $ | 2,922,942 | | | $ | 2,897,066 | |
| Cost of goods sold | 860,051 | | | 757,428 | | | 1,578,911 | | | 1,440,141 | |
| Gross profit | 713,834 | | | 788,104 | | | 1,344,031 | | | 1,456,925 | |
| Selling, general and administrative expenses | 594,424 | | | 599,384 | | | 1,190,138 | | | 1,144,387 | |
| Restructuring and impairment charges | — | | | 16,656 | | | — | | | 19,269 | |
| Income (loss) from operations | 119,410 | | | 172,064 | | | 153,893 | | | 293,269 | |
| Interest income (expense), net | (3,555) | | | (9,261) | | | (9,560) | | | (22,568) | |
| Other income (expense), net | (5,771) | | | (29,476) | | | (20,012) | | | (67,970) | |
| Income (loss) before income taxes | 110,084 | | | 133,327 | | | 124,321 | | | 202,731 | |
| Income tax expense (benefit) | 22,251 | | | 18,962 | | | 27,908 | | | 28,989 | |
| Income (loss) from equity method investments | (908) | | | (921) | | | (1,806) | | | (1,091) | |
| Net income (loss) | $ | 86,925 | | | $ | 113,444 | | | $ | 94,607 | | | $ | 172,651 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Six months ended September 30, |
| (As a percentage of net revenues) | 2022 | | 2021 | | 2022 | | 2021 |
| Net revenues | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 54.6 | % | | 49.0 | % | | 54.0 | % | | 49.7 | % |
| Gross profit | 45.4 | % | | 51.0 | % | | 46.0 | % | | 50.3 | % |
| Selling, general and administrative expenses | 37.8 | % | | 38.8 | % | | 40.7 | % | | 39.5 | % |
| Restructuring and impairment charges | — | % | | 1.1 | % | | — | % | | 0.7 | % |
| Income (loss) from operations | 7.6 | % | | 11.1 | % | | 5.3 | % | | 10.1 | % |
| Interest income (expense), net | (0.2) | % | | (0.6) | % | | (0.3) | % | | (0.8) | % |
| Other income (expense), net | (0.4) | % | | (1.9) | % | | (0.7) | % | | (2.3) | % |
| Income (loss) before income taxes | 7.0 | % | | 8.6 | % | | 4.3 | % | | 7.0 | % |
| Income tax expense (benefit) | 1.4 | % | | 1.2 | % | | 1.0 | % | | 1.0 | % |
| Loss from equity method investment | (0.1) | % | | (0.1) | % | | (0.1) | % | | — | % |
| Net income (loss) | 5.5 | % | | 7.3 | % | | 3.2 | % | | 6.0 | % |
Revenues
Net revenues compriseconsist of net sales, license revenues, and Connected Fitness revenues.revenues from digital subscriptions, other digital business opportunities and advertising. Net sales compriseconsist of sales from our primary product categories, which are apparel, footwear and accessories.accessories products. 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
The following tables summarize net revenues consistby product category and distribution channel for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Six months ended September 30, |
| (In thousands) | 2022 | | 2021 | | Change
$ | | Change %(1) | | 2022 | | 2021 | | Change
$ | | Change %(1) |
| Net Revenues by Product Category | | | | | | | | | | | | | | | |
| Apparel | $ | 1,038,268 | | | $ | 1,058,231 | | | $ | (19,963) | | | (1.9) | % | | $ | 1,906,696 | | | $ | 1,932,424 | | | $ | (25,728) | | | (1.3) | % |
| Footwear | 375,885 | | | 329,718 | | | 46,167 | | | 14.0 | % | | 723,136 | | | 672,359 | | | 50,777 | | | 7.6 | % |
| Accessories | 111,117 | | | 126,345 | | | (15,228) | | | (12.1) | % | | 207,948 | | | 237,848 | | | (29,900) | | | (12.6) | % |
| Net Sales | 1,525,270 | | | 1,514,294 | | | 10,976 | | | 0.7 | % | | 2,837,780 | | | 2,842,631 | | | (4,851) | | | (0.2) | % |
| License revenues | 33,123 | | | 31,099 | | | 2,024 | | | 6.5 | % | | 61,258 | | | 54,360 | | | 6,898 | | | 12.7 | % |
Corporate Other (2) | 15,492 | | | 139 | | | 15,353 | | | N/M | | 23,904 | | | 75 | | | 23,829 | | | N/M |
| Total net revenues | $ | 1,573,885 | | | $ | 1,545,532 | | | $ | 28,353 | | | 1.8 | % | | $ | 2,922,942 | | | $ | 2,897,066 | | | $ | 25,876 | | | 0.9 | % |
| | | | | | | | | | | | | | | |
| Net Revenues by Distribution Channel | | | | | | | | | | | | | | | |
| Wholesale | $ | 948,154 | | | $ | 910,655 | | | $ | 37,499 | | | 4.1 | % | | $ | 1,739,840 | | | $ | 1,678,266 | | | $ | 61,574 | | | 3.7 | % |
| Direct-to-consumer | 577,116 | | | 603,639 | | | (26,523) | | | (4.4) | % | | 1,097,940 | | | 1,164,365 | | | (66,425) | | | (5.7) | % |
| Net Sales | 1,525,270 | | | 1,514,294 | | | 10,976 | | | 0.7 | % | | 2,837,780 | | | 2,842,631 | | | (4,851) | | | (0.2) | % |
| License revenues | 33,123 | | | 31,099 | | | 2,024 | | | 6.5 | % | | 61,258 | | | 54,360 | | | 6,898 | | | 12.7 | % |
| | | | | | | | | | | | | | | |
Corporate Other (2) | 15,492 | | | 139 | | | 15,353 | | | N/M | | 23,904 | | | 75 | | | 23,829 | | | N/M |
| Total net revenues | $ | 1,573,885 | | | $ | 1,545,532 | | | $ | 28,353 | | | 1.8 | % | | $ | 2,922,942 | | | $ | 2,897,066 | | | $ | 25,876 | | | 0.9 | % |
(1)"N/M" = not meaningful
(2) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program, as well as subscription revenues from MMR and revenue from other digital business opportunities.
Net sales
Net sales increased by $11.0 million, or 0.7%, to $1,525.3 million during the three months ended September 30, 2022, from $1,514.3 million during the three months ended September 30, 2021. Apparel decreased primarily due to the impact of digital advertising, digital fitness platform licensesforeign exchange rates and subscriptionslower average selling prices, partially offset by higher unit sales. Footwear increased primarily due to higher units sales, partially offset by lower average selling prices. Accessories decreased primarily due to unfavorable product mix, lower units sales and the impact of foreign exchange rates. From a channel perspective, the increase in net sales was due to an increase in wholesale, partially offset by a decrease in direct-to-consumer.
Net sales decreased by $4.9 million, or 0.2%, to $2,837.8 million during the six months ended September 30, 2022, from $2,842.6 million during the six months ended September 30, 2021. Apparel decreased primarily due to the impact of foreign exchange rates and lower average selling prices, partially offset by higher unit sales. Footwear increased primarily due to higher units sales, partially offset by lower average selling prices and the impact of foreign exchange rates. Accessories decreased primarily due to lower units sales, unfavorable product mix and the impact of foreign exchange rates. From a channel perspective, the decrease in net sales was due to a decrease in direct-to-consumer, partially offset by an increase in wholesale.
License revenues
License revenues increased by $2.0 million, or 6.5%, to $33.1 million during the three months ended September 30, 2022, from $31.1 million during the three months ended September 30, 2021, driven by higher demand and improved business and financial conditions of our licensees. The increased revenue was primarily from our Connected Fitness business.licensing partners in the North America region.
License revenues increased by $6.9 million, or 12.7%, to $61.3 million during the six months ended September 30, 2022, from $54.4 million during the six months ended September 30, 2021, driven by higher demand and improved business and financial conditions of our licensees. The increased revenue was primarily from our licensing partners in the Asia-Pacific and North America regions.
Gross Profit
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 licensedigital subscription and Connected Fitnessadvertising 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; 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$20.2 million and $25.7$38.1 million for the three and six months ended September 30, 2022 (three and six months ended September 30, 2021: $13.8 million and $40.0 million, respectively).
Gross profit decreased by $74.3 million to $713.8 million during the three months ended September 30, 2017 and 2016, respectively, and $74.52022, as compared to $788.1 million and $65.1 million forduring the ninethree months ended September 30, 20172021. Gross profit as a percentage of net revenues, or gross margin, decreased to 45.4% from 51.0%. This decrease in gross margin of 560 basis points was primarily driven by negative impacts of approximately:
•300 basis points from higher promotions and 2016, respectively.discounting;
•100 basis points of supply chain impact mainly due to elevated freight costs;
•70 basis points from unfavorable channel impacts;
•50 basis points of negative effects from changes in foreign currency; and
•30 basis points from unfavorable product mix due to the strength of footwear sales.
Gross profit decreased by $112.9 million to $1,344.0 million during the six months ended September 30, 2022, as compared to $1,456.9 million during the six months ended September 30, 2021. Gross profit as a percentage of net revenues, or gross margin, decreased to 46.0% from 50.3%. This decrease in gross margin of 430 basis points was primarily driven by negative impacts of approximately:
•190 basis points from higher promotions and discounting versus last year;
•130 basis points from supply chain impact mainly due to elevated freight costs;
•80 basis points from unfavorable channel, regional and product mix; and
•30 basis points of negative impact from changes in foreign currency.
We expect higher discounting and promotional activities and foreign exchange rate impacts to continue to negatively impact our gross margin for the next few quarters.
Selling, General and Administrative Expenses
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 related brand marketing, media, and retail presentation. Sports and brand marketing includes professional, club and collegiate sponsorship agreements, individual athlete and influencer agreements, and providing and selling products directly to teams and 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Six months ended September 30, |
| (In thousands) | 2022 | | 2021 | | Change
$ | | Change
% | | 2022 | | 2021 | | Change
$ | | Change
% |
| Selling, General and Administrative Expenses | $ | 594,424 | | | $ | 599,384 | | | $ | (4,960) | | | (0.8) | % | | $ | 1,190,138 | | | $ | 1,144,387 | | | $ | 45,751 | | | 4.0 | % |
Selling, general and administrative expenses decreased by$5.0 million, or 0.8%, during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Within selling, general and administrative expense:
•Marketing costs consistdecreased $23.6 million or 14.1%, due to lower marketing activity during the period. As a percentage of net revenues, marketing costs decreased to 9.1% from 10.8%.
•Other costs increased $18.6 million or 4.3%, primarily driven by higher litigation related accrual, promotion and selling expenses, travel-related expenses and distribution expenses. As a percentage of commercials, print ads, league, team, playernet revenues, other costs increased to 28.6% from 28.0%.
As a percentage of net revenues, selling, general and event sponsorshipsadministrative expenses decreased to 37.8% during the three months ended September 30, 2022 as compared to 38.8% during the three months ended September 30, 2021.
Selling, general and depreciation expense specificadministrative expenses increased by$45.8 million, or 4.0%, during the six months ended September 30, 2022 as compared to the six months ended September 30, 2021. Within selling, general and administrative expense:
•Marketing costs decreased $8.9 million or 2.9%, due to lower marketing activity during the period. As a percentage of net revenues, marketing costs decreased to 10.2% from 10.6%.
•Other costs increased $54.6 million or 6.5%, primarily driven by higher litigation related accrual, compensation expenses, other promotion and selling expenses and travel-related expenses. As a percentage of net revenues, other costs increased to 30.6% from 28.9%.
As a percentage of net revenues, selling, general and administrative expenses increased to 40.7% during the six months ended September 30, 2022 as compared to 39.5% during the six months ended September 30, 2021.
Restructuring and Impairment Charges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Six months ended September 30, |
| (In thousands) | 2022 | | 2021 | | Change
$ | | Change
% | | 2022 | | 2021 | | Change
$ | | Change
% |
| Restructuring and Impairment Charges | $ | — | | | $ | 16,656 | | | $ | (16,656) | | | (100.0) | % | | $ | — | | | $ | 19,269 | | | $ | (19,269) | | | (100.0) | % |
Restructuring and impairment charges within our operating expenses were $16.7 million and $19.3 million during the three and six months ended September 30, 2021, respectively. No charges have been recorded during the three and six months ended September 30, 2022. See Note 12 to our in-store fixture program forCondensed Consolidated Financial Statements.
Interest Expense, net
Interest expense, net is primarily comprised of interest incurred on our concept shops.debt facilities, offset by interest income earned on our cash and cash equivalents.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Six months ended September 30, |
| (In thousands) | 2022 | | 2021 | | Change
$ | | Change
% | | 2022 | | 2021 | | Change
$ | | Change
% |
| Interest expense, net | $ | 3,555 | | | $ | 9,261 | | | $ | (5,706) | | | (61.6) | % | | $ | 9,560 | | | $ | 22,568 | | | $ | (13,008) | | | (57.6) | % |
Interest expense, net decreased by $5.7 million to $3.6 million during the three months ended September 30, 2022. This was primarily due to an increase in interest income and a reduction in interest expense on our
Convertible Senior Notes as a result of repurchasing approximately $419.1 million in aggregate principal amount during Fiscal 2021.
Interest expense, net decreased by $13.0 million to $9.6 million during the six months ended September 30, 2022. This was primarily due to an increase in interest income and a reduction in interest expense on our Convertible Senior Notes as a result of repurchasing approximately $419.1 million in aggregate principal amount during Fiscal 2021. See Note 8 to our Condensed Consolidated Financial Statements.
Other expense,Income (Expense), net
Other income (expense), net primarily 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. Other income (expense), net also includes rent expense relating to lease assets held solely for sublet purposes, primarily the lease related to our New York City, 5th Avenue location.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Six months ended September 30, |
| (In thousands) | 2022 | | 2021 | | Change
$ | | Change
% | | 2022 | | 2021 | | Change
$ | | Change
% |
| Other income (expense), net | $ | (5,771) | | | $ | (29,476) | | | $ | 23,705 | | | 80.4 | % | | $ | (20,012) | | | $ | (67,970) | | | $ | 47,958 | | | 70.6 | % |
Results of Operations
The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage ofOther expense, net revenues:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net revenues | $ | 1,405,615 |
| | $ | 1,471,573 |
| | $ | 3,611,192 |
| | $ | 3,520,058 |
|
| Cost of goods sold | 760,265 |
| | 772,949 |
| | 1,962,172 |
| | 1,863,151 |
|
| Gross Profit | 645,350 |
| | 698,624 |
| | 1,649,020 |
| | 1,656,907 |
|
| Selling, general and administrative expenses | 498,172 |
| | 499,314 |
| | 1,495,992 |
| | 1,403,336 |
|
| Restructuring and impairment charges | 84,998 |
| | — |
| | 88,097 |
| | — |
|
| Income from operations | 62,180 |
| | 199,310 |
| | 64,931 |
| | 253,571 |
|
| Interest expense, net | (9,575 | ) | | (8,189 | ) | | (25,237 | ) | | (18,476 | ) |
| Other expense, net | (1,069 | ) | | (772 | ) | | (1,383 | ) | | (1,025 | ) |
| Income before income taxes | 51,536 |
| | 190,349 |
| | 38,311 |
| | 234,070 |
|
| Income tax expense (benefit) | (2,706 | ) | | 62,124 |
| | (1,349 | ) | | 80,322 |
|
| Net income | $ | 54,242 |
| | $ | 128,225 |
| | $ | 39,660 |
| | $ | 153,748 |
|
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (As a percentage of net revenues) | 2017 | | 2016 | | 2017 | | 2016 |
| Net revenues | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 54.1 | % | | 52.5 | % | | 54.3 | % | | 52.9 | % |
| Gross profit | 45.9 | % | | 47.5 | % | | 45.7 | % | | 47.1 | % |
| Selling, general and administrative expenses | 35.4 | % | | 34.0 | % | | 41.4 | % | | 39.9 | % |
| Restructuring and impairment charges | 6.0 | % | | — | % | | 2.4 | % | | — | % |
| Income from operations | 4.4 | % | | 13.5 | % | | 1.8 | % | | 7.2 | % |
| Interest expense, net | (0.7 | )% | | (0.5 | )% | | (0.7 | )% | | (0.6 | )% |
| Other expense, net | (0.1 | )% | | (0.1 | )% | | — | % | | — | % |
| Income before income taxes | 3.7 | % | | 12.9 | % | | 1.1 | % | | 6.6 | % |
| Income tax expense (benefit) | (0.2 | )% | | 4.2 | % | | — | % | | 2.2 | % |
| Net income | 3.9 | % | | 8.7 | % | | 1.1 | % | | 4.4 | % |
Consolidated Results of Operations
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
Net revenues decreased$66.0 million, or 4.5%, to $1,405.6 million for the three months ended September 30, 2017 from $1,471.6 million during the same period in 2016. Net revenues by product category are summarized below:
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change |
| Apparel | $ | 939,364 |
| | $ | 1,021,185 |
| | $ | (81,821 | ) | | (8.0 | )% |
| Footwear | 285,052 |
| | 278,891 |
| | 6,161 |
| | 2.2 | % |
| Accessories | 123,487 |
| | 121,832 |
| | 1,655 |
| | 1.4 | % |
| Total net sales | 1,347,903 |
| | 1,421,908 |
| | (74,005 | ) | | (5.2 | )% |
| License revenues | 34,324 |
| | 29,484 |
| | 4,840 |
| | 16.4 | % |
| Connected Fitness | 23,388 |
| | 20,181 |
| | 3,207 |
| | 15.9 | % |
| Total net revenues | $ | 1,405,615 |
| | $ | 1,471,573 |
| | $ | (65,958 | ) | | (4.5 | )% |
The decrease in net sales was driven primarily by:
A decline in apparel unit sales in multiple categories led by outdoor, women's training and youth performance, partially offset by unit sales growth in golf and sportstyle.
License revenues increased $4.8 million, or 16.4%, to $34.3 million for the three months ended September 30, 2017 from $29.5 million during the same period in 2016 driven primarily by increased revenue from our licensing partners in North America.
Connected Fitness revenue increased $3.2 million, or 15.9%, to $23.4 million for the three months ended September 30, 2017 from $20.2 million during the same period in 2016, primarily driven by an increase in partnership revenue.
Gross profit decreased $53.2$23.7 million to $645.4 million for the three months ended September 30, 2017 from $698.6 million for the same period in 2016. Gross profit as a percentage of net revenues, or gross margin, decreased 160 basis points to 45.9% for the three months ended September 30, 2017 compared to 47.5% during the same period in 2016. The decrease in gross margin percentage was primarily driven by the following:
approximate 100 basis point decrease due to inventory management strategies in North America including pricing and a higher concentration of sales to our off price partners, which we expect to continue for the remainder of the year;
approximate 50 basis point decrease driven by higher air freight;
approximate 50 basis point decrease due to our international business representing a higher percentage of sales, which we expect to continue for the remainder of the year; and
approximate 30 basis point decrease due to the write-off of inventory as a part of our restructuring plan.
The above decreases were partially offset by:
approximate 50 basis point increase driven by favorable product input costs; and
approximate 20 basis point increase driven by the weakening of the U.S. dollar positively impacting our gross margin within our businesses outside of the United States.
Selling, general and administrative expenses decreased$1.1 million to $498.2 million for the three months ended September 30, 2017 from $499.3 million for the same period in 2016. Within selling, general and administrative expense:
Marketing costs increased $4.4 million to $143.9 million for the three months ended September 30, 2017 from $139.5 million for the same period in 2016. This increase was primarily due to increased marketing in connection with the growth of our international business, partially offset by decreased marketing spend in our North America direct-to-consumer business. As a percentage of net revenues, marketing costs increased to 10.2% for the three months ended September 30, 2017 from 9.5% for the same period in 2016.
Other costs decreased $5.5 million to $354.3 million for the three months ended September 30, 2017 from $359.8 million for the same period in 2016. This decrease was driven primarily by the reversal of incentive compensation accruals, which was partially offset by higher personnel and other costs incurred for the continued expansion of our direct-to-consumer distribution channel, including increased costs related to retail stores, distribution facilities and our e-commerce business. As a percentage of net revenues, other costs increased to 25.2% for the three months ended September 30, 2017 from 24.4% for the same period in 2016.
As a percentage of net revenues, selling, general and administrative expenses increased to 35.4% for the three months ended September 30, 2017 compared to 34.0% for the same period in 2016, primarily due to the decrease in net revenue described above.
Income from operations decreased $137.1 million to $62.2 million for the three months ended September 30, 2017 from income of $199.3 million for the same period in 2016, and as a percentage of net revenues decreased to 4.4% for the three months ended September 30, 2017 from 13.5% for the same period in 2016. Income from operations for the three months ended September 30, 2017 was negatively impacted by $85.0 million of restructuring and impairment charges in connection with the restructuring plan.
Interest expense, net increased $1.4 million to $9.6 million for the three months ended September 30, 2017 from $8.2 million for the same period in 2016. This increase was primarily due to an increase in borrowing on our revolving credit facility.
Other expense, net increased $0.3 million to expense of $1.1 million for the three months ended September 30, 2017 from expense of $0.8 million for the same period in 2016.
Provision for income taxes decreased $64.8 million to a benefit of $2.7$5.8 million during the three months ended September 30, 20172022. This was primarily due to a loss of $23.8 million that was recognized during the three months ended September 30, 2021 upon the extinguishment of $169.1 million in principal amount of our Convertible Senior Notes.
Other expense, net decreased by $48.0 million to $20.0 million during the six months ended September 30, 2022. This was primarily due to a loss of $58.5 million that was recognized during the six months ended September 30, 2021 upon the extinguishment of $419.1 million in principal amount of our Convertible Senior Notes. This was partially offset by a $5.3 million increase in losses associated with foreign currency hedges and a $4.4 million increase in losses from $62.1changes in foreign currency exchange rates.
Income Tax Expense (Benefit)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Six months ended September 30, |
| (In thousands) | 2022 | | 2021 | | Change
$ | | Change
% | | 2022 | | 2021 | | Change
$ | | Change
% |
| Income tax expense (benefit) | $ | 22,251 | | | $ | 18,962 | | | $ | 3,289 | | | 17.3 | % | | $ | 27,908 | | | $ | 28,989 | | | $ | (1,081) | | | (3.7) | % |
Income tax expense increased $3.3 million to $22.3 million during the three months ended September 30, 2022 from income tax expense of $19.0 million during the same period in 2016.2021. For the three months ended September 30, 2017,2022, our effective tax rate was (5.3)%20.2% compared to 32.6%14.2% for the same period in 2016.2021. The change in our effective tax rate forwas primarily driven by the proportion of foreign earnings subject to tax and related valuation allowances in each period, as well as one time discrete benefits recorded in the three months ended September 30, 2017 was lower than2021.
Income tax expense decreased $1.1 million to $27.9 million during the effective tax rate for the threesix months ended September 30, 2016, primarily due to challenged results in North America creating a higher proportion2022 from income tax expense of international profits in 2017, partially offset by non-deductible goodwill impairment charges (See Note 3 to our Consolidated Financial Statements) and the recording of certain valuation allowances.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Net revenues increased $91.1 million, or 2.6%, to $3,611.2 million for the nine months ended September 30, 2017 from $3,520.1$29.0 million during the same period in 2016. Net revenues by product category are summarized below:
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change |
| Apparel | $ | 2,335,454 |
| | $ | 2,300,596 |
| | $ | 34,858 |
| | 1.5 | % |
| Footwear | 791,637 |
| | 785,843 |
| | 5,794 |
| | 0.7 | % |
| Accessories | 335,172 |
| | 302,267 |
| | 32,905 |
| | 10.9 | % |
| Total net sales | 3,462,263 |
| | 3,388,706 |
| | 73,557 |
| | 2.2 | % |
| License revenues | 83,639 |
| | 69,923 |
| | 13,716 |
| | 19.6 | % |
| Connected Fitness | 65,290 |
| | 62,179 |
| | 3,111 |
| | 5.0 | % |
| Intersegment eliminations | — |
| | (750 | ) | | 750 |
| | 100.0 | % |
| Total net revenues | $ | 3,611,192 |
| | $ | 3,520,058 |
| | $ | 91,134 |
| | 2.6 | % |
The increase in net sales was driven primarily by:
Apparel unit sales growth in men's training and golf, partially offset by unit sales decline in outdoor;
Footwear unit sales growth in run, partially offset by unit sales decline in basketball; and
Accessories unit sales growth led by men's training.
License revenues increased $13.7 million, or 19.6%, to $83.6 million during2021. For the ninesix months ended September 30, 2017 from $69.9 million during the same period in 2016, driven primarily by increased revenue from2022, our licensing partners in North America.
Connected Fitness revenue increased $3.1 million, or 5.0%,effective tax rate was 22.4% compared to $65.3 million during the nine months ended September 30, 2017 from $62.2 million during the same period in 2016, primarily driven by a increases in paid subscribers and an increase in advertising and partnership revenues, partially offset by a decrease in hardware sales as we discontinued connected hardware sales as part of our restructuring plan.
Gross profit decreased $7.9 million to $1,649.0 million for the nine months ended September 30, 2017 from $1,656.9 million14.3% for the same period in 2016. Gross profit as a percentage of net revenues, or gross margin, decreased140 basis points to 45.7% for the nine months ended September 30, 2017 compared to 47.1% for the same period2021. The change in 2016. The decrease in gross margin percentageour effective tax rate was primarily driven by the following:proportion of foreign earnings subject to tax and related valuation allowances in each period, as well as one time discrete benefits recorded in the six months ended September 30, 2021.
approximate 90 basis point decrease due to inventory management
SEGMENT RESULTS OF OPERATIONS
Our operating segments are based on how our Chief Operating Decision Maker ("CODM") makes decisions about allocating resources and pricing strategies inassessing performance. Our segments are defined by geographic regions, including North America, EMEA, Asia-Pacific, and Latin America.
We exclude certain corporate costs from our segment profitability measures. We report these costs within Corporate Other, which we expectis designed to continue for the remainderprovide increased transparency and comparability of the year;
approximate 50 basis point decrease driven by higher air freight;
approximate 30 basis point decrease dueour operating segments performance. The costs included within Corporate Other consists largely of revenue and costs related to our internationalMMR
platforms and other digital business representing a higher percentage of sales, which we expect to continue for the remainder of the year; and;
approximate 20 basis point decrease driven by the strengthening of the U.S. dollar negatively impacting our gross margins within our businesses outside of the United States.
The above decreases were partially offset by:
approximate 50 basis point increase driven by favorable sales channel mix due to higher direct to consumer salesopportunities, as a percentage of total sales, which we expect to continue for the remainder of the year.
Selling,well as general and administrative expenses increased$92.7 million not allocated to $1,496.0 million for the nine months ended September 30, 2017 from $1,403.3 million for the same period in 2016. As a percentage of net revenues, selling, generalan operating segment, including expenses associated with centrally managed departments such as global marketing, global IT, global supply chain and administrative expenses increased to 41.4% for the nine months ended September 30, 2017, compared to 39.9% for the same period in 2016. Within in selling, generalinnovation, and administrative expense:
Marketingother corporate support functions; costs increased $38.5 million to $408.3 million for the nine months ended September 30, 2017 from $369.8 million for the same period in 2016. This increase was primarily due to the timing of marketing expenses related to investments in our collegiateglobal assets 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, marketingglobal marketing; costs increased to 11.3% for the nine months ended September 30, 2017 from 10.5% for the same period in 2016.
Other costs increased $54.2 million to $1,087.7 million for the nine months ended September 30, 2017 from $1,033.5 million for the same period in 2016. This increase was primarily due to higher personnel and other costs incurred for the continued expansion of our direct to consumer distribution channel, which was partially offset by the reversal of incentive compensation accruals. Other costs for the nine months ended September 30, 2016 included $24.5 million of expense related to the bankruptcy and liquidation of one of our wholesale customers. As a percentage of net revenues, other costs increased to 30.1% for the nine months ended September 30, 2017, from 29.4% for the same period in 2016.
Income from operations decreased$188.7 million to $64.9 million for the nine months ended September 30, 2017 from $253.6 million for the same period in 2016, and as a percentage of net revenues decreased to 1.8% for the nine months ended September 30, 2017 from 7.2% for the same period in 2016. Income from operations for the nine months ended September 30, 2017 was negatively impacted by $88.1 million ofheadquarters; restructuring and impairment charges in connection with the restructuring plan.
Interest expense, net increased $6.7 million to $25.2 million for the nine months ended September 30, 2017 from $18.5 million for the same period in 2016. This increase was primarily due to interest on the $600 million in Senior Notes issued in June of 2016related charges; 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 million during the nine months ended September 30, 2017 from $80.3 million of expense during the same period in 2016. For the nine months ended September 30, 2017, our effective tax rate was (3.5)% compared to 34.3% for the same period in 2016. The effective tax rate for the nine months ended September 30, 2017 was lower than the effective tax rate for the nine months ended September 30, 2016, primarily due to challenged results in North America creating a higher proportion of international profits in 2017, partially offset by non-deductible goodwill impairment charges (see Note 3 to our Consolidated Financial Statements)certain foreign currency hedge gains and the recording of certain valuation allowances.
Segment Results of Operationslosses.
The net revenues and operating income (loss) associated with our segments are summarized in the following tables. The majority of corporate expenses within North America have not been allocated to our other segments. Intersegment revenue is generated by Connected Fitness which runs advertising campaigns for other segments. Due to the individual materiality of our Asia-Pacific segment, we have separately presented our Asia-Pacific, EMEA and Latin America segments, and will no longer combine these segments for presentation purposes. Net revenues and operating income by segment presented for prior periods have been conformed to the current presentation.
Three Months Ended September 30, 20172022 Compared to Three Months Ended September 30, 20162021
Net Revenues
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, |
| (In thousands) | 2022 | | 2021 | | $ Change | | % Change(1) |
| North America | $ | 1,011,823 | | | $ | 1,035,862 | | | $ | (24,039) | | | (2.3) | % |
| EMEA | 262,679 | | | 241,201 | | | 21,478 | | | 8.9 | % |
| Asia-Pacific | 225,729 | | | 211,950 | | | 13,779 | | | 6.5 | % |
| Latin America | 58,162 | | | 56,380 | | | 1,782 | | | 3.2 | % |
Corporate Other (2) | 15,492 | | | 139 | | | 15,353 | | | N/M |
| Total net revenues | $ | 1,573,885 | | | $ | 1,545,532 | | | $ | 28,353 | | | 1.8 | % |
(1)"N/M" = not meaningful
(2)Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by segment are summarized below:entities within our operating segments but managed through our central foreign exchange risk management program, as well as subscription revenues from MMR and revenue from other digital business opportunities.
|
| | | | | | | | | | | | | | |
| | 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 decreaseincrease in total net revenues was driven by the following:
Net revenues in our North America operating segment decreased $148.1 million to $1,077.1 million for the three months ended September 30, 2017 from $1,225.2 million for the same period in 2016 primarily due2022, compared to lower sales in our wholesale channel driven by lower demand and operational challenges.
Net revenues in our EMEA operating segment increased $22.8 million to $127.9 million for the three months ended September 30, 20172021, was driven by the following:
•Net revenues in our North America region decreased by $24.0 million, or 2.3%, to $1,011.8 million from $105.1 million for$1,035.9 million. This was driven by decreases in both our wholesale and direct to consumer channels. Within the same period in 2016 primarilydirect to consumer channel, net revenues were down due to unita decrease in owned and operated retail store sales, growthpartially offset by an increase in e-commerce sales.
•Net revenues in our EMEA region increased by $21.5 million, or 8.9%, to $262.7 million from $241.2 million. This was driven by an increase in our wholesale partnerschannel, partially offset by a decrease in our direct to consumer channel. Within the United Kingdomdirect to consumer channel, net revenues were lower due to decreases in both owned and Germany.operated retail store sales and e-commerce sales. Net revenues in our EMEA region were also negatively impacted by changes in foreign exchange rates.
•Net revenues in our Asia-Pacific operating segmentregion increased $44.5by $13.8 million, or 6.5%, to $130.3$225.7 million forfrom $212.0 million. This was driven by increases in both our wholesale and direct to consumer channels. Within the three months ended September 30, 2017 from $85.8 million for the same period in 2016 primarilydirect to consumer channel, net revenues were higher due to an increase in owned and operated retail store growthsales, partially offset by a decrease in China and South Korea.e-commerce sales. Net revenues in our Asia-Pacific region were also negatively impacted by changes in foreign exchange rates.
•Net revenues in our Latin America operating segmentregion increased $11.6by $1.8 million, or 3.2%, to $46.9 million for the three months ended September 30, 2017 from $35.3 million for the same period in 2016 primarily due to unit sales growth in our wholesale and direct-to-consumer channels in Brazil and Mexico.
Net revenues in our Connected Fitness operating segment increased $3.2 million to $23.4$58.2 million from $20.2 million for the same period in 2016 primarily$56.4 million. This was driven by an increase in partnership revenue.our wholesale channel, partially offset by a decrease in our direct to consumer channel as we have moved to a distributor operating model for certain countries within this region. Within the direct to consumer channel, net revenues were lower due to a decrease in e-commerce sales, partially offset by an increase in owned and operated retails store sales.
Operating income (loss)•Net revenues in our Corporate Other non-operating segment increased by segment is summarized below:$15.4 million to $15.5 million from $0.1 million. This was primarily driven by foreign currency hedge gains related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program.
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change |
| North America | $ | 65,827 |
| | $ | 182,840 |
| | $ | (117,013 | ) | | (64.0 | )% |
| EMEA | 16,977 |
| | 8,383 |
| | 8,594 |
| | 102.5 | % |
| Asia-Pacific | 34,173 |
| | 27,151 |
| | 7,022 |
| | 25.9 | % |
| Latin America | (10,223 | ) | | (10,550 | ) | | 327 |
| | 3.1 | % |
| Connected Fitness | (44,574 | ) | | (8,514 | ) | | (36,060 | ) | | (423.5 | )% |
| Total operating income | $ | 62,180 |
| | $ | 199,310 |
| | $ | (137,130 | ) | | (68.8 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, |
| (In thousands) | 2022 | | 2021 | | $ Change | | % Change |
| North America | $ | 209,206 | | | $ | 292,367 | | | $ | (83,161) | | | (28.4) | % |
| EMEA | 35,895 | | | 41,772 | | | (5,877) | | | (14.1) | % |
| Asia-Pacific | 46,134 | | | 40,529 | | | 5,605 | | | 13.8 | % |
| Latin America | 7,177 | | | 10,831 | | | (3,654) | | | (33.7) | % |
Corporate Other (1) | (179,002) | | | (213,435) | | | 34,433 | | | 16.1 | % |
| Total operating income (loss) | $ | 119,410 | | | $ | 172,064 | | | $ | (52,654) | | | (30.6) | % |
(1) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program, as well as subscription revenues from MMR and revenue from other digital business opportunities. Corporate Other also includes expenses related to our central supporting functions.
The decrease in total operating income was driven by the following:
Operating income in our North America operating segment decreased $117.0 million to $65.8 million operating income for the three months ended September 30, 2017 from $182.8 million for the same period in 2016 primarily due2022, compared to the decreases in net sales and gross margin discussed above in the Consolidated Results of Operations and $31.0 million in restructuring and impairment charges.
Operating income in our EMEA operating segment increased $8.6 millionto $17.0 million for the three months ended September 30, 20172021, was driven by the following:
•Operating income in our North America region decreased by $83.2 million to $209.2 million from $8.4 million for the same period in 2016$292.4 million. This was primarily due the sales growthto a decline in gross profit driven by lower revenues as discussed above.
above, higher promotions and discounting, and higher freight costs.•Operating income in our EMEA region decreased by $5.9 million to $35.9 million from $41.8 million. This was primarily due to a decline in gross profit, partially offset by a decrease in marketing-related expenses. The decline in gross profit was primarily due to unfavorable channel mix and higher freight costs, partially offset by higher revenues as discussed above.
•Operating income in our Asia-Pacific operating segmentregion increased$7.0 by $5.6 million to $34.2$46.1 million for the three months ended September 30, 2017 from $27.2 million for the same period in 2016$40.5 million. This was primarily due to the sales growthan increase in revenues as discussed above. This increase wasabove and a decrease in marketing-related expenses, partially offset by investmentsan increase in inventory reserves due to excess inventory resulting from COVID-19 supply chain challenges and higher promotions and discounting.
•Operating income in our directLatin America region decreased by $3.7 million to consumer business and entry into new territories.
$7.2 million from $10.8 million. This was primarily due to a decline in gross profit, driven by higher freight costs.•Operating loss in our Latin America operatingCorporate Other non-operating segment decreased $0.3 million to $10.2 million for the three months ended September 30, 2017 from $10.6 million for the same period in 2016$34.4 million. This was primarily due to the sales growth discussed above,gains from foreign currency hedges and no further restructuring charges, partially offset by $6.0 millionan increase in restructuring and impairment chargeslitigation expenses.
Operating loss in our Connected Fitness segment increased $36.1 million to $44.6 million for the three months ended September 30, 2017 from $8.5 million for the same period in 2016 primarily due to $47.8 million in restructuring and impairment charges.
Nine
Six Months Ended September 30, 20172022 Compared to NineSix Months Ended September 30, 20162021
Net Revenues
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended September 30, |
| (In thousands) | 2022 | | 2021 | | $ Change | | % Change(1) |
| North America | $ | 1,921,179 | | | $ | 1,941,355 | | | $ | (20,176) | | | (1.0) | % |
| EMEA | 467,860 | | | 448,425 | | | 19,435 | | | 4.3 | % |
| Asia-Pacific | 402,394 | | | 404,319 | | | (1,925) | | | (0.5) | % |
| Latin America | 107,605 | | | 102,892 | | | 4,713 | | | 4.6 | % |
Corporate Other (2) | 23,904 | | | 75 | | | 23,829 | | | N/M |
| Total net revenues | $ | 2,922,942 | | | $ | 2,897,066 | | | $ | 25,876 | | | 0.9 | % |
(1)"N/M" = not meaningful
(2)Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by segment are summarized below:entities within our operating segments but managed through our central foreign exchange risk management program, as well as subscription revenues from MMR and revenues from other digital business opportunities.
|
| | | | | | | | | | | | | | |
| | 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 for the six months ended September 30, 2022, compared to the six months ended September 30, 2021, was driven by the following:
•Net revenues in our North America operating segmentregion decreased $154.8by $20.2 million, or 1.0%, to $2,778.2$1,921.2 million for the nine months ended September 30, 2017 from $2,932.9 million for the same period$1,941.4 million. This was driven by a decrease in 2016 primarily dueour direct to lower salesconsumer channel, partially offset by an increase in our wholesale channel. Within the direct to consumer channel, drivennet revenues were lower due to a decrease in owned and operated retail store sales, partially offset by lower demand and operational challenges.
an increase in e-commerce sales.•Net revenues in our EMEA operating segmentregion increased $97.1by $19.4 million, or 4.3%, to $334.7$467.9 million for the nine months ended September 30, 2017 from $237.6 million for the same period$448.4 million. This was driven by an increase in 2016 primarilyour wholesale channel, partially offset by a decrease in our direct to consumer channel. Within our direct to consumer channel, net revenues were lower due to unit sales growth to wholesale partnersdecreases in the United Kingdomboth e-commerce and Germany.owned and operated retail store sales. Net revenues in our EMEA region were also negatively impacted by changes in foreign exchange rates.
•Net revenues in our Asia-Pacific operating segment increased $120.7region decreased by $1.9 million, or 0.5%, to $309.7$402.4 million for the nine months ended September 30, 2017 from $189.0 million for the same period in 2016 primarily due to store growth in China and South Korea.
Net revenues$404.3 million. This was driven by an increase in our Latin America operating segment increased $24.2 million to $123.3 million for the nine months ended September 30, 2017 from $99.2 million for the same period in 2016 primarily due to unit sales growth to wholesale partners and through our direct to consumer channels in Mexico, Chile, and Brazil.
Net revenues in our Connected Fitness operating segment increased $3.1 million to $65.3 million for the nine months ended September 30, 2017 from $62.2 million for the same period in 2016 primarily driven by a increases in paid subscribersdistributor channel and an increase in advertising and partnershiplicensing revenues, partially offset by a decrease in hardwareour direct to consumer channel. Within our direct to consumer channel, both e-commerce and owned and operated retail store sales were lower primarily due to COVID-19 related restrictions and limitations, particularly in China. Net revenues in our Asia-Pacific region were also negatively impacted by changes in foreign exchange rates.
•Net revenues in our Latin America region increased by $4.7 million, or 4.6%, to $107.6 million from $102.9 million. This was driven by an increase in our wholesale channel, partially offset by a decrease in our direct to consumer channel as we have moved to a distributor operating model for certain countries within this region. Within our direct to consumer channel, net revenues were lower due to decreases in both e-commerce and owned and operated retail store sales.
•Net revenues in our Corporate Other non-operating segment increased by $23.8 million to $23.9 million from less than $0.1 million. This was primarily driven by foreign currency hedge gains related to revenues generated by entities within our operating segments but managed through our central foreign exchange risk management program.
Operating incomeIncome (loss)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended September 30, |
| (In thousands) | 2022 | | 2021 | | $ Change | | % Change |
| North America | $ | 399,130 | | | $ | 518,136 | | | $ | (119,006) | | | (23.0) | % |
| EMEA | 54,076 | | | 81,664 | | | (27,588) | | | (33.8) | % |
| Asia-Pacific | 66,079 | | | 64,575 | | | 1,504 | | | 2.3 | % |
| Latin America | 13,411 | | | 16,832 | | | (3,421) | | | (20.3) | % |
Corporate Other (1) | (378,803) | | | (387,938) | | | 9,135 | | | 2.4 | % |
| Total operating income (loss) | $ | 153,893 | | | $ | 293,269 | | | $ | (139,376) | | | (47.5) | % |
(1) Corporate Other primarily includes foreign currency hedge gains and losses related to revenues generated by segment is summarized below:entities within our operating segments but managed through our central foreign exchange risk management program, as well as subscription revenues from MMR and revenue from other digital business opportunities. Corporate Other also includes expenses related to our central supporting functions. |
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change |
| North America | $ | 64,124 |
| | $ | 251,084 |
| | $ | (186,960 | ) | | (74.5 | )% |
| EMEA | 13,990 |
| | 8,348 |
| | 5,642 |
| | 67.6 | % |
| Asia-Pacific | 69,050 |
| | 54,399 |
| | 14,651 |
| | 26.9 | % |
| Latin America | (26,175 | ) | | (27,751 | ) | | 1,576 |
| | 5.7 | % |
| Connected Fitness | (56,058 | ) | | (32,509 | ) | | (23,549 | ) | | (72.4 | )% |
| Total operating income | $ | 64,931 |
| | $ | 253,571 |
| | $ | (188,640 | ) | | (74.4 | )% |
The decrease in total operating income for the six months ended September 30, 2022, compared to the six months ended September 30, 2021, was primarily driven by the following:
•Operating income in our North America operating segmentregion decreased $187.0by $119.0 million, to $64.1$399.1 million for the nine months ended September 30, 2017 from $251.1 million for the same period in 2016$518.1 million. This was primarily due to the decreasesa decline in net sales and gross marginprofit, driven by lower revenues as discussed above, higher promotions and discounting and higher freight costs. Additionally, operating income was down as a result of an increase in the Consolidated Results of Operationscompensation expenses, selling expenses 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 expensefacility related to the liquidation of one of our wholesale customers.expenses.
•Operating income in our EMEA operating segment increased $5.6region decreased by $27.6 million to $14.0$54.1 million for the nine months ended September 30, 2017 from $8.3 million for the same period in 2016$81.7 million. This was primarily due sales growth discussed above, which wasto a decline in gross profit, partially offset by a decrease in marketing-related expenses. The decline in gross profit was primarily due to unfavorable channel mix and higher freight costs, related to a distributor termination.partially offset by higher revenues as discussed above.
•Operating income in our Asia-Pacific operating segmentregion increased$14.7 by $1.5 millionto $69.1$66.1 million for the nine months ended September 30, 2017 from $54.4 million for the same period in 2016$64.6 million. This was primarily due to the sales growtha decrease in marketing-related expenses and facility costs, partially offset by lower gross profit, driven by higher promotions and discounting and lower net revenues as discussed above.
•Operating income in our Latin America region decreased by $3.4 million to $13.4 million from $16.8 million. This increase was primarily due to higher freight costs and higher marketing-related expenses, partially offset by investments in our direct to consumer business and entry into new territories.
higher net revenues.•Operating loss in our Latin America operatingCorporate Other non-operating segment decreased $1.6 million to $26.2 million for the nine months ended September 30, 2017 from $27.8 million for the same period in 2016$9.1 million. This was primarily due to the sales growth discussed abovegains from foreign currency hedges and no further restructuring charges, partially offset by $6.5 millionan increase in restructuringlitigation and impairment charges.consulting expenses.
Operating loss in our Connected Fitness segment increased $23.5 million to $56.1 million for the nine months ended September 30, 2017 from $32.5 million for the same period in 2016 primarily due to $47.8 million in restructuring and impairment charges.
Seasonality
Historically, we have recognized a majority of our net revenues and a significant portion of our income from operations in the last two quarters of the year, driven primarily by increased sales volume of our products during the fall selling season, including our higher priced cold weather products, along with a larger proportion of higher margin direct to consumer sales. The level of our working capital generally reflects the seasonality and growth in our business.
Financial Position, Capital Resources and LiquidityLIQUIDITY AND CAPITAL RESOURCES
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 historically recognize the majority of our net revenues in the last two quarters of the calendar year. Our capital investments have generally included expanding our in-store fixture and branded concept shop program, improvements and expansion of our distribution and corporate facilities, to support our growth, leasehold improvements to our brandBrand and factory houseFactory 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 houseFactory House stores and other liquidation channels.
As of September 30, 2022, we had approximately $853.7 million of cash and cash equivalents. We believe our cash and cash equivalents on hand, cash from operations, our ability to access the debt capital markets andreduce our expenditures as needed, borrowings available to us under our amended credit agreement, our ability to access the capital markets, and other financing instrumentsalternatives are adequate to
meet our liquidity needs and capital expenditure requirements for at least the next twelve months. In addition, from time to time, based on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors and subject to compliance with applicable laws and regulations, we may seek to utilize cash on hand, borrowings or raise capital to retire, repurchase or redeem our debt securities, repay debt, repurchase shares of our common stock or otherwise enter into similar transactions to support our capital structure and business or utilize excess cash flow on a strategic basis. For example, as described below, in February 2022, our Board of Directors authorized the repurchase of up to $500 million of our Class C Common Stock over the following two years and, subsequently, we entered into agreements related to accelerated share repurchase transactions to repurchase $300 million, $25 million and $25 million of our Class C Common Stock in February 2022, May 2022 and August 2022, respectively.
As discussed above, COVID-19 has continued to create supply chain challenges that will impact the availability of September 30, 2017,inventory over the next few quarters. If there are unexpected material impacts to our business in future periods from COVID-19 and we had $1.0 billion of remaining availability underneed to raise or conserve additional cash to fund our revolving credit facility. Althoughoperations, we believemay consider additional alternatives similar to those we have adequateused in Fiscal 2020, including further reducing our expenditures, changing our investment strategies, negotiating payment terms with our customers and vendors, reductions in compensation costs, including through temporary reductions in pay and layoffs, and limiting certain marketing and capital expenditures. In addition, we may seek alternative sources of liquidity, overincluding but not limited to, accessing the long term, an economic recessioncapital markets, sale leaseback transactions or a slow recovery could adversely affect our business and liquidity. In addition,other sales of assets, or other alternative financing measures. However, instability in, or tightening of the capital markets, could adversely affect our ability to obtain additionalaccess the capital to grow our businessmarkets on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, a prolonged or more severe economic recession, inflationary pressure, or a slow recovery could adversely affect our business and liquidity.
Refer to our "Risk Factors" section included in Item 1A of our Annual Report on Form 10-K for Fiscal 2021.
Share Repurchase Program
On February 23, 2022, our Board of Directors authorized us to repurchase up to $500 million (exclusive of fees and commissions) of outstanding shares of our Class C Common Stock over the following two years. The Class C Common Stock may be repurchased from time to time at prevailing prices in the open market, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, via private purchases through forward, derivative, accelerated share repurchase transactions or otherwise, subject to
applicable regulatory restrictions on volume, pricing and timing. The timing and amount of any repurchases will depend on market conditions, our financial condition, results of operations, liquidity and other factors.
During the three months ended September 30, 2022, we entered into a master confirmation, including a supplemental confirmation (the "August ASR Agreement"), of an accelerated share repurchase transaction with HSBC Bank USA, National Association ("HSBC") to repurchase $25.0 million of our Class C Common Stock, and received a total of 3.2 million shares of Class C Common Stock from HSBC, which were immediately retired. As a result, $24.7 million was recorded to retained earnings to reflect the difference between the market price of the Class C Common Stock repurchased and its par value.
During the six months ended September 30, 2022, pursuant to the August ASR Agreement and the previously disclosed accelerated share repurchase transactions that we entered into in February 2022 and May 2022 (together with the August ASR Agreement, the "ASR Agreements"), we repurchased 9.9 million shares of Class C Common Stock, which were immediately retired. As a result, $99.4 million was recorded to retained earnings to reflect the difference between the market price of the Class C Common Stock repurchased and its par value.
As of September 30, 2022, we have repurchased $350 million or 26.1 million outstanding shares of our Class C Common Stock under our share repurchase program. The number of shares was determined based on the average of the Rule 10b-18 volume-weighted average prices of our Class C Common Stock during the terms of the transactions, less an agreed discount, and subject to adjustments pursuant to the terms of the ASR Agreements.
Cash Flows
The following table presents the major components of netour cash flows provided by and used in operating, investing and financing activities for the periods presented:
|
| | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 |
| Net cash provided by (used in): | | | |
| Operating activities | $ | (29,193 | ) | | $ | (36,033 | ) |
| Investing activities | (227,572 | ) | | (316,042 | ) |
| Financing activities | 256,881 |
| | 402,273 |
|
| Effect of exchange rate changes on cash and cash equivalents | 7,416 |
| | (96 | ) |
| Net increase in cash and cash equivalents | $ | 7,532 |
| | $ | 50,102 |
|
| | | | | | | | | | | | | | | | | |
| | Six months ended September 30, |
| (In thousands) | 2022 | | 2021 | | $ Change |
| Net cash provided by (used in): | | | | | |
| Operating activities | $ | (2,499) | | | $ | 360,456 | | | $ | (362,955) | |
| Investing activities | (58,864) | | | (48,343) | | | (10,521) | |
| Financing activities | (48,788) | | | (413,999) | | | 365,211 | |
| Effect of exchange rate changes on cash and cash equivalents | (43,962) | | | 8,608 | | | (52,570) | |
| Net increase (decrease) in cash and cash equivalents | $ | (154,113) | | | $ | (93,278) | | | $ | (60,835) | |
Operating Activities
Operating activities consist primarily of net income adjusted for certain non-cash items. Adjustments to net income for non-cash items include depreciation and amortization, unrealized foreign currency exchange rate gains and losses, losses on disposals of property and equipment, impairment charges, stock-based compensation, excess tax benefits from stock-based compensation arrangements, deferred income taxes and changes in reserves and allowances. In addition, operating cashCash flows include the effect of changes in operating assets and liabilities, principally inventories, accounts receivable, income taxes payable and receivable, prepaid expenses and other assets, accounts payable and accrued expenses.
Cash used in operating activities decreased $6.8increased by $363.0 million, as compared to $29.2 million for the ninesix months ended September 30, 2017 from $36.0 million during the same period in 2016. The decrease in cash used in operating activities was due to2021, primarily driven by a decrease in net cash outflows from operating assets and liabilitiesincome before the impact of $42.7 million offset by an decrease in net income adjusted for non-cash items of $35.9 million. The$110.1 million and a decrease in cash outflows related tofrom changes in operating assets and liabilities period over period was primarily driven by:working capital of $252.9 million.
an increaseThe changes in the change in accounts receivable of $204.1 million in the current period compared to the prior period,working capital were primarily due to the timing of cash collectionsfollowing outflows:
•$281.8 million from new customers;changes in inventories;
•$69.6 million from changes other non-current assets; and
•$60.7 million from changes in accounts receivable;
These outflows were partially offset by the following working capital inflows:
a decrease•$124.0 million from changes in income taxes payableaccounts payable;
•$20.5 million from changes in accrued expenses and receivable of $127.2other liabilities; and
•$12.6 million and a decreaseresulting from changes in inventories of $57.2 million.customer refund liabilities.
Investing Activities
Cash flows used in investing activities decreased $88.4increased by $10.5 million, as compared to $227.6 million for the ninesix months ended September 30, 2017 from $316.0 million for the same period in 2016,2021, primarily due to loweran increase in capital expenditures. This was partially offset by the collection of the earn-out previously recorded in connection with the sale of the MyFitnessPal platform.
CapitalTotal capital expenditures forduring the full year 2017 are expected to be approximately $300.0 million, comprised primarily of investments in our distribution centers and retail stores.
Financing Activities
Cash provided by financing activities decreased$145.4 million to $256.9 million for the ninesix months ended September 30, 20172022 were $93.9 million, or approximately 3% of net revenues, representing a $44.7 million increase from $402.3$49.2 million during the six months ended September 30, 2021. During Fiscal 2021, we reduced capital expenditures in response to ongoing uncertainty related to COVID-19. Moving forward, we anticipate capital expenditures to normalize back towards our
long-term operating principle of between 3% and 5% of annual net revenues as we invest in our global direct-to-consumer, e-Commerce and digital businesses, information technology systems, distribution centers and our global offices. In April 2021, we unveiled plans to construct a new global headquarters in the Port Covington area of Baltimore, Maryland. Subsequently in May 2022, we announced additional details about our plan to design our new headquarters in line with our long-term sustainability strategy, which includes a commitment to reduce greenhouse gas emissions and increase sourcing of renewable electricity in our owned and operated facilities. We expect a portion of our capital expenditures over the short term to include investments incorporating sustainable and intelligent building design features into this facility.
Financing Activities
Cash flows used in financing activities decreased by $365.2 million, as compared to the six months ended September 30, 2021. During the six months ended September 30, 2021, we paid $506.3 million to certain exchanging holders for the same periodexchange of $419.1 million in 2016. This decrease was primarily dueaggregate principal amount of our 1.50% convertible senior notes. Concurrently with this exchange we terminated certain capped call agreements and in exchange received approximately $91.7 million. During the six months ended September 30, 2022, we paid $50.0 million to lower borrowings on our revolving credit facility.repurchase Class C common shares through accelerate share repurchase programs. For more details, see discussion above under "Share Repurchase Program".
Capital Resources
Credit Facility
We are party to aOn March 8, 2019, we entered into an amended and restated credit agreement thatby and among us, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and arrangers party thereto (the "credit agreement"). In May 2020, May 2021 and December 2021, we entered into the first, second and third amendments to the credit agreement, respectively (the credit agreement as amended and the "amended credit agreement" or the "revolving credit facility"). The amended credit agreement provides for revolving credit commitments for up to $1.25of $1.1 billion of borrowings, as well asand has a term loan commitments, in each case maturing in January 2021.that ends on December 3, 2026, with permitted extensions under certain circumstances. As of September 30, 2017,2022 and March 31, 2022, there was $270.0 millionwere no amounts outstanding under the revolving credit facility and $167.5 million of term loan borrowings outstanding.facility.
At our request and thea lender's consent, revolving and or term loan borrowingscommitments under the amended credit agreement may be increased by up to $300.0 million in aggregate, subject to certain conditions as set forth in the amended credit agreement, as amended.agreement. Incremental borrowings are uncommitted and the availability thereof will depend on market conditions at the time we seek to incur such borrowings.
The borrowingsBorrowings, if any, 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 $4.6As of September 30, 2022, there was $4.5 million of letters of credit outstanding as(March 31, 2022: $4.5 million).
Our obligations under the amended credit agreement are guaranteed by certain domestic significant subsidiaries of September 30, 2017.Under Armour, Inc., subject to customary exceptions (the "subsidiary guarantors") and primarily secured by a first-priority security interest in substantially all of the assets of Under Armour, Inc. and the subsidiary guarantors, excluding real property, capital stock in and debt of subsidiaries of Under Armour, Inc. holding certain real property and other customary exceptions. The amended credit agreement provides for the permanent fall away of guarantees and collateral upon our achievement of investment grade rating from two rating agencies.
The amended credit agreement contains negative covenants that, subject to significant exceptions, limit our ability to, among other things,things: incur additional indebtedness, make restricted payments,secured and unsecured indebtedness; pledge ourthe assets as security,security; make investments, loans, advances, guarantees and acquisitions (including investments in and loans to non-guarantor subsidiaries); undergo fundamental changes andchanges; sell assets outside the ordinary course of business; enter into transactions with affiliates. affiliates; and make restricted payments.
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 1.001.0 (the "interest coverage covenant") 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"1.0 (the "leverage covenant"). The method of calculating these ratios is set forth, as described in ourmore detail in the amended credit agreement and differs from how rating agencies or other companies may calculate similar measures.agreement. As of September 30, 2017,2022, we were in compliance with these ratios. the applicable covenants.
In addition, the amended credit agreement contains events of default that are customary for a facility of this nature, and includes a cross default provision whereby an event of default under other material indebtedness, as
defined in the amended credit agreement, will be considered an event of default under the amended credit agreement.
The amended credit agreement implements SOFR as the replacement of LIBOR as a benchmark interest rate for the U.S. dollar borrowings (and analogous benchmark rate replacements for borrowings in Yen, Canadian Dollars, Pound Sterling and Euro). Borrowings under the amended credit agreement bear interest at a rate per annum equal to, at our option, either (a) an alternate base rate or(for borrowings in U.S. dollars), (b) a term rate based on the rates applicable for deposits(for borrowings in the interbank market for U.S. Dollarsdollars, Euros, Japanese Yen or the applicable currencyCanadian Dollars) or (c) a "risk free" rate (for borrowings in which the loans are made (“adjusted LIBOR”)U.S. dollars or Pounds Sterling), plus in each case an applicable margin. The applicable margin for loans will be adjusted by reference to a grid (the “Pricing Grid”"pricing grid") based on the consolidated leverage ratio of consolidated total indebtedness to consolidated EBITDA and ranges between 1.00% to 1.25% for adjusted LIBOR loans and 0.00% to 0.25% for1.75% (or, in the case of alternate base rate loans. The weighted average interest rates under the outstanding term loans and revolving credit facility borrowings were 2.4% and 2.2% during the nine months ended September 30, 2017 and 2016, respectively.0.00% to 0.75%). We will also pay a commitment fee determined in accordance with the pricing grid on the average daily unused amount of the revolving credit facility and certain fees with respect to letters of credit. As of September 30, 2017,2022, the commitment fee was 15.015 basis points.
1.50% Convertible Senior Notes
In May 2020, we issued $500.0 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the "Convertible Senior Notes"). The Convertible Senior Notes bear interest at the rate of 1.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The Convertible Senior Notes will mature on June 1, 2024, unless earlier converted in accordance with their terms, redeemed in accordance with their terms or repurchased.
The net proceeds from the offering (including the net proceeds from the exercise of the over-allotment option) were $488.8 million, after deducting the initial purchasers' discount and estimated offering expenses that we paid, of which we used $47.9 million to pay the cost of the capped call transactions described below. We utilized $439.9 million to repay indebtedness that was outstanding under our revolving credit facility at the time, and to pay related fees and expenses.
The Convertible Senior Notes are not secured and are not guaranteed by any of our subsidiaries. The indenture governing the Convertible Senior Notes does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.
In May 2021 and August 2021, we entered into exchange agreements with certain holders of the Convertible Senior Notes, who agreed to exchange $250.0 million and approximately $169.1 million, respectively, in aggregate principal amount of the Convertible Senior Notes for cash and/or shares of our Class C Common Stock, plus payment for accrued and unpaid interest (the "Exchanges"). In connection with the Exchanges, we paid approximately $300.0 million and $207.0 million cash, respectively, and issued approximately 11.1 million and 7.7 million shares of the Company's Class C Common Stock, respectively, to the exchanging holders. Additionally, we recognized losses on debt extinguishment of $34.7 million during the second quarter of Fiscal 2021 and $23.8 million during the third quarter of Fiscal 2021, which were recorded within Other Income (Expense), net on our Condensed Consolidated Statements of Operations. Following the Exchanges, approximately $80.9 million aggregate principal amount of the Convertible Senior Notes remain outstanding.
The Convertible Senior Notes are convertible into cash, shares of our Class C Common Stock or a combination of cash and shares of Class C Common Stock, at our election, as described further below. The initial conversion rate is 101.8589 shares of our Class C Common Stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $9.82 per share of Class C Common Stock), subject to adjustment if certain events occur. Prior to the close of business on the business day immediately preceding January 1, 2024, holders may (at their option) convert their Convertible Senior Notes only upon satisfaction of one or more of the following conditions:
•during any calendar quarter commencing after the calendar quarter ended on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our Class C Common Stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our Class C Common Stock and the conversion rate on each such trading day;
•upon the occurrence of specified corporate events or distributions on our Class C Common Stock; or
•if we call any Convertible Senior Notes for redemption prior to the close of business on the business day immediately preceding January 1, 2024.
On or after January 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Senior Notes at the conversion rate at any time irrespective of the foregoing conditions.
On or after December 6, 2022, we may redeem for cash all or any part of the Convertible Senior Notes, at our option, if the last reported sale price of our Class C Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If we undergo a fundamental change (as defined in the indenture governing the Convertible Senior Notes) prior to the maturity date, subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Convertible Senior Notes in principal amounts of $1,000 or an integral multiple thereof at a price which will be equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Concurrently with the offering of the Convertible Senior Notes, we entered into privately negotiated capped call transactions with JPMorgan Chase Bank, National Association, HSBC Bank USA, National Association, and Citibank, N.A. (the "option counterparties"). The capped call transactions are expected generally to reduce potential dilution to our Class C Common Stock upon any conversion of Convertible Senior Notes and/or offset any cash payments we are required to make in excess of the aggregate principal amount of converted Convertible Senior Notes upon any conversion thereof, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions is initially $13.4750 per share of our Class C Common Stock, representing a premium of 75% above the last reported sale price of our Class C Common Stock on May 21, 2020, and is subject to certain adjustments under the terms of the capped call transactions.
In May 2021 and August 2021, concurrently with the Exchanges, we entered into, with each of the option counterparties, termination agreements relating to a number of options corresponding to the number of Convertible Senior Notes exchanged. Pursuant to such termination agreements, each of the option counterparties paid us a cash settlement amount in respect of the portion of capped call transactions being terminated. We received approximately $53.0 million and $38.6 million, respectively, in connection with such termination agreements related to the Exchanges.
The Convertible Senior Notes contain a cash conversion feature. Prior to the adoption of ASU 2020-06, we had separated it into liability and equity components. We valued the liability component based on its borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which was recognized as a debt discount, was valued as the difference between the face value of the Convertible Senior Notes and the fair value of the liability component.
We adopted ASU 2020-06 on January 1, 2022 using the modified retrospective method. As a result, the Convertible Senior Notes are no longer accounted for as separate liability and equity components, but rather a single liability. See Note 2 to the Condensed Consolidated Financial Statements included in Part I of our Transition Report on Form 10-Q for the three months ended March 31, 2022 for more details.
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”"Senior Notes"). The proceeds were used to pay down amounts outstanding under the revolving credit facility.facility, at the time. Interest is payable semi-annually on June 15 and December 15 beginning December 15, 2016. Prior to March 15, 2026 (three months prior to the maturity date of the Notes), we may redeem some or all of the Senior Notes at any time or from time to time at a redemption price equal to the greater of 100% of the principal amount of the Senior Notes to be redeemed or a “make-whole”"make-whole" amount applicable to such Senior Notes as described in the indenture governing the Senior Notes, plus accrued and unpaid interest to, but excluding, the redemption date. On or after March 15, 2026 (three months prior to the maturity date of the Notes), we may redeem some or all of the Notes at any time or from time to time at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The indenture governing the Senior Notes contains covenants, including limitations that restrict our ability and the ability of certain of our subsidiaries to create or incur secured indebtedness and enter into sale and
leaseback transactions and our ability to consolidate, merge or transfer all or substantially all of our properties or assets to another person, in each case subject to material exceptions described in the indenture.
Other Long Term Debt
In December 2012, we entered into a $50.0 million recourse loan collateralized by the land, buildings and tenant improvements comprising our corporate headquarters. The loan has a seven year term and maturity date of December 2019. The loan bears interest at one month LIBOR plus a margin of 1.50%, and allows for prepayment without penalty. The loan includes covenants and events of default substantially consistent with our credit agreement discussed above. The loan also requires prior approval of the lender for certain matters related to the property, including transfers of any interest in the property. As of September 30, 2017, December 31, 2016 and September 30, 2016, the outstanding balance on the loan was $40.5 million, $42.0 million and $42.5 million, respectively. The weighted average interest rate on the loan was 2.7% and 2.5% for the three and nine months ended September 30, 2017, respectively.
Interest expense, net was $9.6 million and $8.2 million for the three months ended September 30, 2017 and 2016, respectively, and $25.2 million and $18.5 million for the nine months ended September 30, 2017, and 2016, respectively. Interest expense includes the amortization of deferred financing costs, bank fees, capital and built-to-suit lease interest and interest expense under the credit and other long term debt facilities.
We monitor the financial health and stability of our lenders under the credit and other long term debt facilities, however during any period of significant instability in the credit markets, lenders could be negatively impacted in their ability to perform under these facilities.
Contractual Commitments and Contingencies
Other than the borrowings and repayments disclosed above in the "Capital Resources" section and changes which occur in the normal course of business, there were no significant changes to the contractual obligations reported in our 2016 Form 10-K as updated in our Form 10-Q for the quarter ended September 30, 2017.
Critical Accounting Policies and EstimatesCRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
Our consolidated financial statementsCondensed 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 2016 Form 10-K. The SEC suggests companies provide additional disclosure on those accounting policies considered most critical. The SEC considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgments and estimates on the part of management in its application. Our estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. For a complete discussion of our critical accounting policies, see the “Critical Accounting Policies” section of the MD&A in our 2016 Form 10-K. There were no significant changes to our critical accounting policies during the nine months ended September 30, 2017.
Recently Issued Accounting StandardsActual results could be significantly different from these estimates.
Refer to Note 2 to the notes toof our financial statementsConsolidated Financial Statements, included in thisour Annual Report on Form 10-Q10-K for Fiscal 2021, for a summary of our significant accounting policies and 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, 2016.2021. For a discussion of our exposure to market risk, refer to our Annual Reportreport on Form 10-K for the year ended December 31, 2016.Fiscal 2021.
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”"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 beganWe have assessed 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 operationalimpact on July 5, 2017, in our North America, EMEA, and Connected Fitness operations. We believe the implementation of the systems and related changes to internal controls will enhance our internal controls over financial reporting. We also believe the necessary stepsreporting, and conclude that there have been taken to monitor and maintain appropriate internal control over financial reporting during this period of change and will continue to evaluate the operating effectiveness of related key controls during subsequent periods.
We are currently in the process of developing an implementation strategy and roll-out plan for FMS in our Asia-Pacific and Latin America operations over the next several years.
As the phased implementation of this system occurs, we will experience certain changes to our processes and procedures which, in turn, result in changes to our internal control over financial reporting. While we expect FMS to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as each of the affected areas evolve. For a discussion of risks related to the implementation of new systems, see Item 1A - "Risk Factors - Risks Related to Our Business - Risks and uncertainties associated with the implementation of information systems may negatively impact our business" in our Annual Report on Form 10-K for the year ended December 31, 2016.
There have been no other changes in our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during the most recent fiscal quarter that hashave materially affected, or that isare reasonably likely to materially affect our internal controlcontrols over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that a significant number of our employees have transitioned to a hybrid work environment. We continue to monitor and assess impacts of hybrid work on our control environment and control activities in order to minimize the impact on the design and operating effectiveness of our controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we arehave been involved in litigation and other proceedings, including matters related to commercial disputes and intellectual property, as well as trade, regulatory and other claims related to our business. See Note 59 to our Condensed Consolidated Financial Statements for information on certain legal proceedings, which is incorporated by reference herein.
ITEM 1A. RISK FACTORS
Our results of operations and financial condition could be adversely affected by numerous risks. In addition to the other information in this Quarterly Report on Form 10-Q, you should carefully consider the Risk Factors includedrisk factors discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K filed withfor Fiscal 2021. These are not the Securitiesonly risks and Exchange Commission foruncertainties facing us. Additional risks not currently known to us or that we currently believe are immaterial may also negatively impact our business, financial condition, results of operations and future prospects.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer purchases of equity securities:
The following table sets forth the yearCompany's repurchases of Class C Common Stock during the three months ended December 31, 2016. The Company is supplementing those risk factorsSeptember 30, 2022 under the two-year $500 million share repurchase program authorized by adding the Risk Factor set forth below.our Board of Directors in February 2022.
Our restructuring plan may not be successful, or we may not fully realize the expected benefits of our restructuring plan or other operating or cost-saving initiatives. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Program | | Approximately Dollar Value of Shares that May Yet be Purchased Under the Program
(in millions) |
| 07/01/2022 to 07/31/2022 | | — | | | — | | | — | | | — | |
08/01/2022 to 08/31/2022 (1) | | 2,604,167 | | | $ | 7.68 | | | 2,604,167 | | | $ | 155.0 | |
09/01/2022 to 09/30/2022 (1) | | 640,100 | | | $ | 7.42 | | | 640,100 | | | $ | 150.0 | |
During the third quarter of 2017, we announced a restructuring plan designed to more closely align our financial resources against the critical priorities of our business. This plan included a reduction in our global workforce, as well as other initiatives to improve operational efficiencies. Restructuring plans present significant potential risks that may impair our ability to achieve anticipated operating improvements and/or cost reductions. These risks include, among others, higher than anticipated costs in implementing our restructuring plans, management distraction from ongoing business activities, damage(1)Represents Class C Common Stock repurchased through accelerated share repurchase agreements. See Note 10 to our reputation and brand image and workforce attrition beyond planned reductions. If we are unable to successfully implement and manage our restructuring plans, we may not achieve our targeted operational improvements and efficiencies, including planned cost reductions. This could adversely impact our operating results and financial condition, and our future resultsCondensed Consolidated Financial Statements for details.
ITEM 6. EXHIBITS
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| | | | | | | |
Exhibit No. | |
| |
| | Under Armour, Inc. Executive Change in Control Severance Plan* |
| | Under Armour, Inc. Executive Severance Program* |
| | Form of Separation Agreement between the Company and Stephanie Pugliese, including General Release.* |
| | Section 302 Chief Executive Officer Certification |
| Certification. |
| | Section 302 Chief Financial Officer Certification |
| Certification. |
| | Section 906 Chief Executive Officer Certification |
| Certification. |
| | Section 906 Chief Financial Officer CertificationCertification. |
| 101.INS | |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| 101.SCH | |
101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Management contract or a compensatory plan or arrangement required to be filed as an Exhibit pursuant to Item 6 of Form 10-Q.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| UNDER ARMOUR, INC. |
| | |
| UNDER ARMOUR, INC.By: | /s/ DAVID E. BERGMAN |
| | |
| By: | /s/ DAVID E. BERGMAN
|
| | David E. Bergman |
| | Chief Financial Officer
|
Date: November 8, 20172022
