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 | June 30, 2023 | | June 30, 2022 |
| Cash and cash equivalents | $ | 703,591 | | | $ | 1,049,413 | |
| Restricted cash | 17,254 | | | 13,649 | |
| Total cash, cash equivalents and restricted cash | $ | 720,845 | | | $ | 1,063,062 | |
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, from youth to professional on playing fields around the globe, as well as by consumers with active lifestyles. 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 Policiesworldwide.
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 statement of the financial position and results of operations were included. Intercompany balances and transactions were eliminated. eliminated upon consolidation. Additionally, certain prior period comparative amounts in the condensed consolidated statement of shareholders' equity have been reclassified to conform to the current period presentation. Such reclassifications were not material and did not affect the condensed consolidated financial statements.
The consolidated balance sheetunaudited Condensed Consolidated Balance Sheet as of December 31, 2016June 30, 2023 is derived from the audited financial statements included in the Company’sCompany's Annual Report on Form 10-K for the fiscal year ended March 31, 2023 ("Fiscal 2023"), filed with the SEC on May 24, 2023 ("Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”Fiscal 2023"), which should be read in conjunction with these consolidated financial statements.unaudited Condensed Consolidated Financial Statements. The unaudited results for the three and nine months ended SeptemberJune 30, 2017,2023, are not necessarily indicative of the results to be expected for the fiscal year ending DecemberMarch 31, 20172024 ("Fiscal 2024"), 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 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 first two quartersCompany 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 2017.the Company's Annual Report on Form 10-K for Fiscal 2023.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently IssuedAdopted Account Pronouncements
The Company assesses the applicability and impact of all Accounting Standards
In May 2014,Standard Updates ("ASUs") issued by the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update ("ASU") 2014-09, which supersedes. The following ASU was adopted during the most current revenue recognition requirements. This ASU requires entities to recognize revenue in a way that depicts the transferfirst quarter of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. This ASU will be effective for annual and interim periods beginning after December 15, 2017, with early adoption for annual and interim periods beginning after December 15, 2016 permitted.Fiscal 2024.
The Company’s initial assessment
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.Supplier Finance Programs
In February 2016,September 2022, the FASB issued ASU 2016-02,2022-04 "Liabilities - Supplier Finance Programs (Subtopic 405-50)" ("ASU 2022-04") which amendsrequires entities to disclose the existing guidance for leases and will require recognition of operating leases with leasekey terms of more than twelve monthssupplier finance programs used in connection with the purchase of goods and all financing leasesservices along with information about their obligations under these programs, including a rollforward of those obligations. The Company adopted ASU 2022-04 on the balance sheet. For these leases, companies will record assetsApril 1, 2023 on a retrospective basis, except for the rights and liabilities foramendments relating to the obligations thatrollforward requirement, which are created by the leases. This ASU will require disclosures that provide qualitative and quantitative information for the lease assets and liabilities recorded in the financial statements. This ASU is effective for fiscal years beginning after December 15, 2018.required to be adopted on April 1, 2024 on a prospective basis. The Company is currently evaluating this ASU to determine the impact of its adoption on its consolidated financial statements. The Company currently anticipates adopting the new standard effective January 1, 2019. The Company has formed a committee and initiated the review process for adoption of this ASU. While the Company is still in the process of completing its analysis on the complete impact this ASU will have on its consolidated financial statements and related disclosures, it expects the ASU todid not have a material impact on the Company's Condensed Consolidated Financial Statements. Refer to Note 8 for a discussion of the Company's supply chain finance program.
Recently Issued Accounting Pronouncements
The Company assessed all recently issued ASUs and determined them to be either not applicable or expected to have no material impact on its consolidated balance sheetfinancial position and results of operations.
NOTE 3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company's allowance for recognitiondoubtful accounts was established with information available as of lease-related assetsJune 30, 2023, including reasonable and liabilities.supportable estimates of future risk. The following table illustrates the activity in the Company'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 as of March 31, 2023 | $ | 10,813 | | | $ | 227 | |
| Increases (decreases) to costs and expenses | 1,496 | | | — | |
| Write-offs, net of recoveries | 79 | | | — | |
| Balance as of June 30, 2023 | $ | 12,388 | | | $ | 227 | |
In August 2017,(1) Includes an allowance pertaining to a royalty receivable.
NOTE 4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the FASB issued ASU 2017-12, which simplifies the applicationfollowing:
| | | | | | | | | | | |
| As of June 30, 2023 | | As of March 31, 2023 |
| Leasehold and tenant improvements | $ | 476,002 | | | $ | 462,721 | |
| Furniture, fixtures and displays | 287,804 | | | 289,539 | |
| Buildings | 69,256 | | | 48,632 | |
| Software | 389,444 | | | 380,586 | |
| Office equipment | 131,414 | | | 132,301 | |
| Plant equipment | 178,197 | | | 178,194 | |
| Land | 83,626 | | | 83,626 | |
Construction in progress (1) | 117,913 | | | 143,243 | |
| Other | 16,656 | | | 17,837 | |
| Subtotal property and equipment | 1,750,312 | | | 1,736,679 | |
| Accumulated depreciation | (1,071,198) | | | (1,063,943) | |
| Property and equipment, net | $ | 679,114 | | | $ | 672,736 | |
(1) Construction in progress primarily includes costs incurred for construction of hedge accountingcorporate offices, software systems, leasehold improvements 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 statementsin-store fixtures and related disclosures.displays not yet placed in use.
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 compensationproperty and equipment was $35.8 million for vested awards. Additionally,the three months ended June 30, 2023 (three months ended June 30, 2022: $33.9 million).
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 2038, excluding extensions at the Company's option, and include provisions for rental adjustments. Short-term lease payments were not material for the three months ended June 30, 2023 and 2022.
Lease Costs and Other 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 Statement of Operations, for the periods indicated: | | | | | | | | | | | |
| Three months ended June 30, |
| 2023 | | 2022 |
| Operating lease costs | $ | 41,091 | | | $ | 35,555 | |
| Variable lease costs | $ | 2,756 | | | $ | 3,623 | |
There are no residual value guarantees that exist, and there are no restrictions or covenants imposed by leases. The Company rents or subleases certain excess office facilities and warehouse space to third parties. Sublease income is not material.
The weighted average remaining lease term and discount rate for the periods indicated below were as follows: | | | | | | | | | | | |
| As of June 30, 2023 | | As of March 31, 2023 |
| Weighted average remaining lease term (in years) | 7.99 | | 8.03 |
| Weighted average discount rate | 4.86 | % | | 4.69 | % |
Supplemental Cash Flow Information
The following table presents supplemental information relating to cash flow arising from lease transactions: | | | | | | | | | | | |
| Three months ended June 30, |
| 2023 | | 2022 |
| Operating cash outflows from operating leases | $ | 43,614 | | | $ | 41,865 | |
| Leased assets obtained in exchange for new operating lease liabilities | $ | 5,380 | | | $ | 19,589 | |
Maturity of Lease Liabilities
The following table presents the future minimum lease payments under the Company's operating lease liabilities as of June 30, 2023: | | | | | |
| Fiscal year ending March 31, |
| 2024 (nine months ending) | $ | 129,494 | |
| 2025 | 161,177 | |
| 2026 | 128,644 | |
| 2027 | 108,006 | |
| 2028 | 91,134 | |
| 2029 and thereafter | 363,107 | |
| Total lease payments | $ | 981,562 | |
| Less: Interest | 164,563 | |
| Total present value of lease liabilities | $ | 816,999 | |
As of June 30, 2023, the Company made a policy election underhas additional operating lease obligations that have not yet commenced of approximately $6.4 million, which are not reflected in the provisionstable 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, 2023 | $ | 301,371 | | | $ | 101,096 | | | $ | 79,525 | | | $ | — | | | $ | 481,992 | |
| Effect of currency translation adjustment | — | | | 1,561 | | | (3,985) | | | — | | | (2,424) | |
| Balance as of June 30, 2023 | $ | 301,371 | | | $ | 102,657 | | | $ | 75,540 | | | $ | — | | | $ | 479,568 | |
NOTE 7. INTANGIBLE ASSETS, NET
The following tables summarize the Company's intangible assets as of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Useful Lives from Date of Acquisitions (in years) | | As of June 30, 2023 |
| | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount |
| Intangible assets subject to amortization: | | | | | | |
| Customer relationships | 2-6 | | 8,559 | | | (4,643) | | | 3,916 | |
| Lease-related intangible assets | 1-15 | | 1,729 | | | (1,623) | | | 106 | |
| Total | | | $ | 10,288 | | | $ | (6,266) | | | $ | 4,022 | |
| Indefinite-lived intangible assets | | | | | | | 4,594 | |
| Intangible assets, net | | | | | | | $ | 8,616 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Useful Lives from Date of Acquisitions (in years) | | As of March 31, 2023 |
| | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount |
| Intangible assets subject to amortization: | | | | | | |
| Technology | 5-7 | | $ | 2,536 | | | $ | (2,503) | | | $ | 33 | |
| Customer relationships | 2-6 | | 8,711 | | | (4,377) | | | 4,334 | |
| Lease-related intangible assets | 1-15 | | 1,664 | | | (1,542) | | | 122 | |
| Total | | | $ | 12,911 | | | $ | (8,422) | | | $ | 4,489 | |
| Indefinite-lived intangible assets | | | | | | | 4,451 | |
| Intangible assets, net | | | | | | | $ | 8,940 | |
Amortization expense, which is included in selling, general and administrative expenses, was $0.4 million for forfeitures when they occur rather than estimating the numberthree months ended June 30, 2023 (three months ended June 30, 2022: $0.5 million).
During the three months ended June 30, 2023, the Company reduced the gross carrying amount and related accumulated amortization of awards that are expected to vest. Astechnology assets by $2.5 million as a result of this election,such assets being fully amortized.
The following is the estimated future amortization expense for the Company's intangible assets as of June 30, 2023: | | | | | |
| Fiscal year ending March 31, |
| 2024 (nine months ending) | $ | 1,128 | |
| 2025 | 1,504 | |
| 2026 | 1,381 | |
| 2027 | 9 | |
| 2028 | — | |
| 2029 and thereafter | — | |
| Total amortization expense of intangible assets | $ | 4,022 | |
NOTE 8. SUPPLY CHAIN FINANCE PROGRAM
The Company facilitates a supply chain finance program, administered through third party platforms, which provides participating suppliers with the opportunity to finance payments due from the Company recorded a $1.9 million cumulative-effect benefitwith certain third-party financial institutions. Participating suppliers may, at their sole discretion, elect to retained earnings asfinance one or more invoices of the date of adoption. Company prior to their scheduled due dates at a discounted price with the participating financial institution.
The Company adoptedCompany’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by the provisions of this ASU relatedsupplier’s decision to changes onfinance amounts under these arrangements. As such, the outstanding payment obligations under the Company’s supply chain financing program are included within Accounts Payable in the Condensed Consolidated Balance Sheets and within operating activities in the Condensed Consolidated Statement of Cash Flows on a retrospective basis.Flows.
Excess tax benefits and deficiencies have been classified within cash flows from operating activities and employee taxes paid for shares withheld for income taxes have been classified within cash flows from financing activities on the Consolidated Statement of Cash Flows. This resulted in an increase of $44.4 million to the cash flows from operating activities section and a decrease of $13.7 million to the cash flows from financing activities section of the Consolidated Statement of Cash Flows for the nine months ended September 30, 2016.
In October 2016, the FASB issued ASU 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted the provisions ofCompany’s outstanding payment obligations under this ASU on a modified retrospective basis on January 1, 2017, resulting in a cumulative-effect benefit to retained earnings of $26.0program were $276.8 million as of the date of adoption.June 30, 2023 (March 31, 2023: $250.8 million).
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
NOTE 9. CREDIT FACILITY AND OTHER LONG-TERM DEBT
The Company's outstanding debt consisted of the test. The Company adopted the provisions of this ASU on July 1, 2017, and recorded an impairment charge of $28.6 million during its interim goodwill impairment test for the Connected Fitness reporting unit.
3. Restructuring and Impairment
A description of significant restructuring and related impairment charges is included below:
Restructuring
On July 27, 2017, the Company’s Board of Directors approved a restructuring plan (the “restructuring plan”) to more closely align its financial resources with the critical priorities of the business. The Company’s original expectation was to incur estimated pre-tax restructuring and related charges of approximately $110.0 to $130.0 million for the year ended December 31, 2017. In the third quarter of 2017, the Company recognized approximately $59.9 million of pre-tax charges in connection with this restructuring plan, which included $31.2 million of asset impairments and $28.7 million of restructuring related charges including employee related severance, contract terminations and other restructuring related costs. In addition to these charges, the Company also recognized restructuring related goodwill impairment charges of approximately $28.6 million for its Connected Fitness business which was not included in the Company’s original range estimate. Inclusive of the goodwill impairment, the Company now expects to incur total pre-tax restructuring and related charges of approximately $140.0 to $150.0 million for the year ending December 31, 2017.
Impairment
As a part of the restructuring plan, the Company abandoned the use of several assets included within Property and Equipment, resulting in an impairment charge of $14.4 million, reducing the carrying value of these assets to their estimated fair values. Fair value was estimated using an income-approach based on Management’s forecast of future cash flows expected to be derived from the assets' use.
Additionally, in connection with the restructuring plan, strategic decisions were made during the third quarter in 2017 to abandon the use of certain intangible assets in the Company's Connected Fitness reporting unit. These intangible assets included technology and brand names, resulting in total intangible asset impairment charges of $12.1 million, reducing the carrying value of these assets to their estimated fair values. Fair value was estimated using an income-approach based on management’s forecast of future cash flows expected to be derived from the assets use. In addition, the Company also made the strategic decision to not pursue certain other planned future revenue streams in connection with the restructuring plan.
The Company determined sufficient indication existed to trigger the performance of an interim goodwill impairment for Company’s Connected Fitness reporting unit. Using updated cash flow projections, the Company calculated the fair value of the Connected Fitness reporting unit based on the discounted cash flows model. The carrying value exceeded the fair value, resulting in an impairment of goodwill. As the excess of the carrying value for the Connected Fitness reporting unit was greater than the goodwill for this reporting unit, all $28.6 million of goodwill was impaired.
The summary of the costs incurred during the three and nine months ended September 30, 2017, as well as the Company’s current estimates of the amount expected to be incurred during the remainder of 2017, are as follows:
|
| | | | | | | | | | | | | | | | |
| | Restructuring and Impairment Charges incurred | Estimated Restructuring and Impairment Charges to be Incurred |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended December 31, | | Total | |
| (In thousands) | 2017 | | 2017 | | 2017 (2) | | 2017 (2) | |
| Costs recorded in cost of goods sold: | | | | | | | | |
| Inventory write-offs (1) | $ | 3,597 |
| | $ | 3,597 |
| | $ | — |
| | $ | 3,597 |
| |
| Total costs recorded in cost of goods sold | 3,597 |
| | 3,597 |
| | — |
| | 3,597 |
| |
| | | | | | | | | |
| Costs recorded in restructuring and impairment charges: | | | | | | | | |
| Goodwill impairment | 28,647 |
| | 28,647 |
| | — |
| | 28,647 |
| |
| Property and equipment impairment | 14,415 |
| | 14,415 |
| | — |
| | 14,415 |
| |
| Employee related costs | 11,657 |
| | 12,159 |
| | 3,000 |
| | 15,159 |
| |
| Intangible asset impairment | 12,054 |
| | 12,054 |
| | — |
| | 12,054 |
| |
| Other restructuring related costs | 12,603 |
| | 15,200 |
| | 23,000 |
| | 38,200 |
| |
| Contract exit costs | 5,622 |
| | 5,622 |
| | 31,000 |
| | 36,622 |
| |
| Total costs recorded in restructuring and impairment charges | 84,998 |
| | 88,097 |
| | 57,000 |
| | 145,097 |
| |
| Total restructuring, impairment and restructuring related costs | $ | 88,595 |
| | $ | 91,694 |
| | $ | 57,000 |
| | $ | 148,694 |
| |
(1) This table includes an additional non-cash charge of $3.6 million for the three and nine months ended September 30, 2017 associated with the reduction of inventory outside of current liquidation channels in line with the restructuring plan.
(2) Estimated restructuring and impairment charges to be incurred reflect the high-end of the range of the estimated remaining charges expected to be taken by the Company during 2017 in connection with the restructuring plan.
4. Long Term Debtfollowing: | | | | | | | | | | | |
| As of
June 30, 2023 | | As of
March 31, 2023 |
| 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 | (750) | | | (814) | |
| Unamortized debt issuance costs - Convertible Senior Notes | (165) | | | (267) | |
| Unamortized debt issuance costs - Senior Notes | (1,593) | | | (1,728) | |
| Unamortized debt issuance costs - Credit facility | (3,385) | | | (3,632) | |
| Total amount outstanding | 675,026 | | | 674,478 | |
| Less: | | | |
| Current portion of long-term debt: | | | |
| 1.50% Convertible Senior Notes due 2024 | 80,919 | | | — | |
| | | |
| Non-current portion of long-term debt | $ | 594,107 | | | $ | 674,478 | |
Credit Facility
TheOn March 8, 2019, the Company is party to aentered into an amended and restated credit agreement thatby and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, 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 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 SeptemberJune 30, 2017,2023 and March 31, 2023, 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 June 30, 2023, there were $4.6$4.3 million of letters of credit outstanding as(March 31, 2023: $4.4 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 SeptemberJune 30, 2017,2023, 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, 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 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 SeptemberJune 30, 2017,2023, the commitment fee was 15.017.5 basis points. Since inception,
1.50% Convertible Senior Notes
The Company has approximately $80.9 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the "Convertible Senior Notes") outstanding as of June 30, 2023, which were issued in May 2020. The Convertible Senior Notes bear interest at the fixed 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 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 incurredor any of its subsidiaries.
The Convertible Senior Notes are convertible into cash, shares of the Company's Class C Common Stock or a combination of cash and deferred $3.9 millionshares 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 financing costswhich 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.
Beginning on 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 connectioneffect 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 credit agreement.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.
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 underSenior Notes bear interest at the revolving credit facility. Interest isfixed rate of 3.250% per annum, 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 termlong-term debt facilities. Interest expense, net was $1.6 million for the three months ended June 30, 2023 (three months ended June 30, 2022: $6.0 million).
The following are the scheduled maturities of long-term debt as of June 30, 2023: | | | | | |
| Fiscal year ending March 31, |
| 2024 (nine months ending) | $ | — | |
| 2025 | 80,919 | |
| 2026 | — | |
| 2027 | 600,000 | |
| 2028 | — | |
| 2029 and thereafter | — | |
| Total scheduled maturities of long-term debt | $ | 680,919 | |
| |
| Current maturities of long-term debt | $ | 80,919 | |
The Company monitors the financial health and stability of its lenders under the credit and other long termlong-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 10. 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 2016 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 the Baltimore Peninsula, an area of Baltimore previously referred to as 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 ActCompany determined that the claims should not be pursued by the Company and both of 1933, as amended (the “Securities Act”)these purported stockholders were informed of that determination.
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.
Prior to the filing of the derivative complaints in connectionthese 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 Company’s public offering of senior unsecured notes in June 2016. The Securities Act claims are asserted againstconsolidated Kenney action into a single consolidated derivative action (the "Consolidated State Derivative Action"); (ii) designating the Company,Kenney action as the Company’s Chief Executive Officer, Mr. Molloy,lead case; and (iii) specifying that the Company’s directors who signed the registration statement pursuant to which the offering was made and the underwriters that participatedscheduling order in the offering. Bucks County alleges thatKenney action shall control the offering materials utilized in connection with the offering contained false and/or misleading statements and omissions regarding, among other things, the Company’s growth and consumer demand for certain of the Company’s products.Consolidated State Derivative Action.
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
On January 27, 2021, the District Court entered an order consolidating for all purposes four separate stockholder derivative cases that previously had been filed in the court. On February 2, 2023, the District Court issued an order appointing Balraj Paul and Anthony Viskovich as lead plaintiffs (“Derivative Lead Plaintiffs”), appointing counsel for the Derivative Lead Plaintiffs as lead counsel, and recaptioning the consolidated case as Paul et al. v. Plank et al. (the “Federal Court Derivative Action”). Prior to their filing derivative complaints, both of the Derivative Lead Plaintiffs had sent the Company's Board of Directors a letter demanding that the Company pursue claims similar to the claims asserted in the derivative complaints. Following an investigation, a majority of disinterested and independent directors of the Company determined that the claims should not be pursued by the Company, and the Derivative Lead Plaintiffs were informed of that determination. 6. Fair Value MeasurementsOn March 16, 2023, the District Court issued an order granting a motion for voluntary dismissal without prejudice that had been filed by the plaintiff in one of the four derivative cases who had not been appointed as a lead plaintiff. The other three consolidated derivative cases remain pending as part of the Federal Court Derivative Action.
On April 24, 2023, the Derivative Lead Plaintiffs designated an operative complaint in the Federal Court Derivative Action. The operative complaint names Mr. Plank, certain other current and former members of the Company's Board of Directors, and certain other current and former Company executives as defendants, and names the Company as a nominal defendant. It asserts 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; and (iv) the Company's supposed failure to timely disclose investigations by the SEC and DOJ. The operative complaint asserts breach of fiduciary duty and unjust enrichment claims against the defendants, and asserts a contribution claim under the federal securities laws against certain defendants. The operative complaint seeks damages on behalf of the Company, and also seeks certain corporate governance related actions. The Company and the defendants filed a motion to dismiss the operative complaint on June 23, 2023. Briefing in connection with that motion is not yet complete.
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 June 30, 2023, 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 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.
In addition, in connection with the matters described above and previously disclosed government investigations, the Company provided notice of claims under multiple director and officer liability insurance policy periods. With respect to one policy period, a lawsuit was filed against the Company by certain of its insurance carriers seeking a declaration that no further amounts will be payable with respect to that policy period and with respect to one carrier, reimbursement for $10 million in defense and investigation costs previously paid to the Company. On April 26, 2023, the Company and one of its insurance carriers resolved the dispute related to that carrier’s claims for a declaration that no further amounts would be payable and seeking reimbursement of previously paid amounts. The resolution resulted in no reimbursement payable by the Company. The other carriers remaining in the case continue to seek a declaration that no further amounts will be payable with respect to that policy period. The timing of the resolution is unknown for the remaining claims in this matter.
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 11. 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 June 30, 2023. 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 Chair 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 has a par value of $0.0003 1/3 per share as of June 30, 2023. 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.
No shares were repurchased under the share repurchase program during the three months ended June 30, 2023 (three months ended June 30, 2022: 6.7 million shares of Class C Common Stock repurchased and immediately retired).
As of the date of this Quarterly Report on Form 10-Q, the Company has repurchased a total of $425 million or 34.9 million outstanding shares of its Class C Common Stock under its share repurchase program.
NOTE 12. REVENUES
The following tables summarize the Company's net revenues by product category and distribution channels: | | | | | | | | | | | |
| | Three Months Ended June 30, |
| 2023 | | 2022 |
| Apparel | $ | 824,660 | | | $ | 868,428 | |
| Footwear | 363,670 | | | 347,251 | |
| Accessories | 97,862 | | | 96,831 | |
| Net Sales | 1,286,192 | | | 1,312,510 | |
| License revenues | 25,072 | | | 28,135 | |
| Corporate Other | 5,748 | | | 8,412 | |
| Total net revenues | $ | 1,317,012 | | | $ | 1,349,057 | |
| | | | | | | | | | | |
| | Three Months Ended June 30, |
| 2023 | | 2022 |
| Wholesale | $ | 741,958 | | | $ | 791,686 | |
| Direct-to-consumer | 544,234 | | | 520,824 | |
| Net Sales | 1,286,192 | | | 1,312,510 | |
| License revenues | 25,072 | | | 28,135 | |
| Corporate Other | 5,748 | | | 8,412 | |
| Total net revenues | $ | 1,317,012 | | | $ | 1,349,057 | |
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
June 30, 2023 | | As of
March 31, 2023 |
| Customer refund liability | $ | 136,017 | | | $ | 160,533 | |
| Inventory associated with reserves for sales returns | $ | 32,925 | | | $ | 40,661 | |
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 which are in 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 June 30, 2023, contract liabilities were $26.2 million (March 31, 2023: $25.9 million).
During the three months ended June 30, 2023, the Company recognized approximately $3.2 million of revenue that was previously included in contract liabilities as of March 31, 2023. During the three months ended June 30, 2022, the Company recognized approximately $4.8 million of revenue that was previously included in contract liabilities as of March 31, 2022. 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.
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 of $3.4 million for the three months ended June 30, 2023 (three months ended June 30, 2022: $1.6 million).
In addition, the Company offers the Under Armour, Inc. Deferred Compensation Plan (the "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 June 30, 2023, the Deferred Compensation Plan obligations, which are included in other long-term liabilities on the Condensed Consolidated Balance Sheets were $14.6 million (March 31, 2023: $14.1 million).
The Company established a Rabbi Trust to fund obligations to participants in the Deferred Compensation Plan. As of June 30, 2023, the assets held in the Rabbi Trust were trust owned life insurance ("TOLI") policies with cash-surrender values of $8.0 million (March 31, 2023: $7.7 million). 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 June 30, 2023, 8.3 million Class A shares and 17.4 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 months ended June 30, 2023 was $10.3 million (three months ended June 30, 2022: $11.4 million). As of June 30, 2023, the Company had $101.9 million of unrecognized compensation expense related to
these awards expected to be recognized over a weighted average period of 2.29 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. 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 June 30, 2023.
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 June 30, 2023, 2.7 million Class A shares and 1.0 million Class C shares are available for future purchases under the ESPP. During the three months ended June 30, 2023, 145.2 thousand Class C shares were purchased under the ESPP (three months ended June 30, 2022: 121.4 thousand).
Awards granted to Certain Marketing and Other 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 and other partners in connection with their entering into endorsement or other service agreements with the Company. 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 months ended June 30, 2023 was $2.3 million (three months ended June 30, 2022: $0.8 million). As of June 30, 2023, the Company had $77.7 million of unrecognized compensation expense associated with these awards expected to be recognized over a weighted average period of 10.73 years.
Summary by Award Classification:
Stock Options
A summary of the Company's stock options activity for the three months ended June 30, 2023 is presented below: | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Total Intrinsic Value |
| Outstanding at March 31, 2023 | 1,578 | | | $ | 19.44 | | | 4.82 | | $ | — | |
| Granted, at fair market value | — | | | — | | | — | | | — | |
| Exercised | — | | | — | | | — | | | — | |
| Forfeited | — | | | — | | | — | | | — | |
| Outstanding at June 30, 2023 | 1,578 | | | $ | 19.44 | | | 4.57 | | $ | — | |
| Options exercisable at June 30, 2023 | 1,503 | | | $ | 19.66 | | | 4.47 | | $ | — | |
Restricted Stock and Restricted Stock Unit Awards
A summary of the Company's restricted stock and restricted stock unit awards activity for the three months ended June 30, 2023 is presented below:
| | | | | | | | | | | |
| Number of Restricted Shares | | Weighted Average Grant Date Fair Value |
| Outstanding at March 31, 2023 | 7,658 | | | $ | 13.01 | |
| Granted | 15,863 | | | 7.84 | |
| Forfeited | (488) | | | 12.12 | |
| Vested | (873) | | | 14.21 | |
| Outstanding at June 30, 2023 | 22,160 | | | $ | 9.28 | |
The awards outstanding at June 30, 2023 in the table above includes 1.0 million performance-based restricted stock units that were awarded to certain executives and key employees during Fiscal 2023 under the 2005 Plan. 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. The Company deemed the achievement of certain of these targets probable and recorded $0.3 million of stock-based compensation expense related to these awards during the three months ended June 30, 2023 (three months ended June 30, 2022: $0.4 million). The Company assesses the probability of the achievement of the remaining revenue and operating income targets at the end of each reporting period and based on that assessment cumulative adjustments may be recorded in future periods.
NOTE 15. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).date. The fair value accounting guidance outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures, and prioritizes the inputs used in measuring fair value as follows:
|
| | | | |
| Level 1: | Observable inputs such as quoted prices in active markets; |
| |
| Level 2: | Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |
| |
| Level 3: | Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Financial assets and liabilities measured at fair value on a recurring basis
The Company's financial assets (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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 | | March 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| Derivative foreign currency contracts (see Note 16) | $ | — | | | $ | (18,403) | | | $ | — | | | $ | — | | | $ | (3,127) | | | $ | — | |
| TOLI policies held by the Rabbi Trust (see Note 13) | $ | — | | | $ | 8,042 | | | $ | — | | | $ | — | | | $ | 7,691 | | | $ | — | |
| Deferred Compensation Plan obligations (see Note 13) | $ | — | | | $ | (14,641) | | | $ | — | | | $ | — | | | $ | (14,082) | | | $ | — | |
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 Compensation Plan”), which represent the underlying liabilities to participants in the Deferred Compensation Plan.participants. 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-term debt is estimated based upon quoted prices for similar instruments or quoted prices for identical instruments in inactive markets (Level 2).
SomeAs of June 30, 2023, the fair value of the Convertible Senior Noteswas $78.2 million (March 31, 2023: $85.8 million).
As of June 30, 2023, the fair value of the Senior Notes was $551.6 million (March 31, 2023: $553.9 million).
Assets and liabilities measured at fair value on a non-recurring basis
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 parthedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to forecasted cash flows and assessing, both at inception and on an ongoing basis, the effectiveness of its incentive compensation. Certain senior executivesthe hedging relationships.
The Company's foreign exchange risk management program consists of designated cash flow hedges and undesignated hedges. As of June 30, 2023, the Company has hedge instruments primarily for:
•British Pound/U.S. Dollar;
•U.S. Dollar/Chinese Renminbi;
•Euro/U.S. Dollar;
•U.S. Dollar/Canadian Dollar;
•U.S. Dollar/Mexican Peso; and
•U.S. Dollar/Korean Won.
All derivatives are eligible to receive performance-based awards. Duringrecognized on the nine months ended September 30, 2017, 1.8 million performance-based restricted stock unitsCondensed Consolidated Balance Sheets at fair value and 0.5 million performance-based stock options for sharesclassified based on the instrument's maturity date.
The following table presents 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 tiedderivative instruments within the Condensed Consolidated Balance Sheets. Refer to the achievement of certain combined revenue and operating income targets for 2017 and 2018. Upon the achievementNote 15 of the targets, one halfCondensed Consolidated Financial Statements for a discussion of the restricted stock units and options will vest eachfair value measurements.
| | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet Classification | | June 30, 2023 | | March 31, 2023 |
| Derivatives designated as hedging instruments under ASC 815 | | | | |
| Foreign currency contracts | | Other current assets | | $ | 19,845 | | | $ | 22,473 | |
| Foreign currency contracts | | Other long-term assets | | 2,239 | | | 619 | |
| Total derivative assets designated as hedging instruments | | $ | 22,084 | | | $ | 23,092 | |
| | | | | | |
| Foreign currency contracts | | Other current liabilities | | $ | 30,863 | | | $ | 21,622 | |
| Foreign currency contracts | | Other long-term liabilities | | 9,362 | | | 5,769 | |
| Total derivative liabilities designated as hedging instruments | | $ | 40,225 | | | $ | 27,391 | |
| | | | | | |
| Derivatives not designated as hedging instruments under ASC 815 | | | | |
| Foreign currency contracts | | Other current assets | | $ | 5,818 | | | $ | 3,408 | |
| Total derivative assets not designated as hedging instruments | | $ | 5,818 | | | $ | 3,408 | |
| | | | | | |
| Foreign currency contracts | | Other current liabilities | | $ | 8,988 | | | $ | 6,563 | |
| Foreign currency contracts | | Other long-term liabilities | | — | | | 4 | |
| Total derivative liabilities not designated as hedging instruments | | $ | 8,988 | | | $ | 6,567 | |
The following table presents the amounts in February 2019 and February 2020.
If certain lower levelsthe Condensed Consolidated Statement of
combined annual revenue and operating income for 2017 and 2018Operations in which the effects of cash flow hedges are
achieved, fewer or no restricted stock units or options will vestrecorded and the
remaining restricted stock unitseffects of cash flow hedge activity on these line items: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2023 | | 2022 |
| Total | | Amount of Gain (Loss) on Cash Flow Hedge Activity | | Total | | Amount of Gain (Loss) on Cash Flow Hedge Activity |
| Net revenues | $ | 1,317,012 | | | $ | 4,475 | | | $ | 1,349,057 | | | $ | 6,554 | |
| Cost of goods sold | $ | 709,276 | | | $ | 294 | | | $ | 718,860 | | | $ | (1,948) | |
| Interest income (expense), net | $ | (1,626) | | | $ | (9) | | | $ | (6,005) | | | $ | (9) | |
| Other income (expense), net | $ | (6,385) | | | $ | — | | | $ | (14,241) | | | $ | — | |
The following tables present the amounts affecting the Condensed Consolidated Statements of Comprehensive Income (Loss):
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of
March 31, 2023 | | 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 June 30, 2023 |
| Derivatives designated as cash flow hedges | | | | | | |
| Foreign currency contracts | $ | (4,764) | | | $ | (10,681) | | | $ | 4,769 | | | $ | (20,214) | |
| Interest rate swaps | (458) | | | — | | | (9) | | | (449) | |
| Total designated as cash flow hedges | $ | (5,222) | | | $ | (10,681) | | | $ | 4,760 | | | $ | (20,663) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 June 30, 2022 |
| Derivatives designated as cash flow hedges | | | | | | |
| Foreign currency contracts | $ | 41 | | | $ | 56,258 | | | $ | 4,606 | | | $ | 51,693 | |
| Interest rate swaps | (495) | | | — | | | (9) | | | (486) | |
| Total designated as cash flow hedges | $ | (454) | | | $ | 56,258 | | | $ | 4,597 | | | $ | 51,207 | |
The following table presents the amounts in the Condensed Consolidated Statement of Operations in which the effects of undesignated derivative instruments are recorded and options will be forfeited. The Company deemed the achievementeffects 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 tofair value hedge activity on 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.line items: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, |
| 2023 | | 2022 |
| Total | | Amount of Gain (Loss) on Fair Value Hedge Activity | | Total | | Amount of Gain (Loss) on Fair Value Hedge Activity |
| Other income (expense), net | $ | (6,385) | | | $ | (2,312) | | | $ | (14,241) | | | $ | (4,002) | |
During 2016, the Company granted performance-based restricted stock units and options with vesting conditions tied to the achievement of certain combined annual operating income targets for 2016 and 2017. As of September 30, 2017, the Company deems the achievement of these operating income targets improbable. As such, no expense for these awards has been recorded during the three and nine months ended September 30, 2017.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 SeptemberJune 30, 2017,2023, the aggregate notional value of the Company's outstanding foreign currency contractscash flow hedges was $338.6$1,071.8 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(March 31, 2023: $799.7 million), 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 entersmay enter into foreign currency contracts designated as cash flow hedges. For foreign currency contracts designated as cash flow hedges, changes in fair value, excluding any ineffective portion, are recorded in other comprehensive income until net income is affected by the variability in cash flows of the hedged transaction. The effective portion is generally released to net income after the maturity of the related derivative and is classified in the same manner as the underlying exposure.
During the three and nine months ended September 30, 2017, the Company reclassified $0.1 million and $1.8 million from other comprehensive income to cost of goods sold related to foreign currency contracts designated as cash flow hedges, respectively. The fair values of the Company's foreign currency contracts were a liability of $7.8 million as of September 30, 2017, and were included in accrued expenses on the consolidated balance sheet. The fair values of the Company's foreign currency contracts were assets of $15.2 million and $1.6 million as of December 31, 2016 and September 30, 2016, respectively, and were included in prepaid expenses and other current assets on the consolidated balance sheet. Refer to Note 6 for a discussion of the fair value measurements. Included in other expense, net were the following amounts related to changes in foreign currency exchange rates and derivative foreign currency contracts:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Unrealized foreign currency exchange rate gains (losses) | $ | 1,035 |
| | $ | 985 |
| | $ | 30,429 |
| | $ | 4,846 |
|
| Realized foreign currency exchange rate gains (losses) | 3,221 |
| | (2,635 | ) | | 865 |
| | (3,094 | ) |
| Unrealized derivative gains (losses) | 388 |
| | 516 |
| | (838 | ) | | (401 | ) |
| Realized derivative gains (losses) | (4,182 | ) | | 426 |
| | (26,972 | ) | | (2,415 | ) |
Interest Rate Risk Management
In order to maintain liquidity and fund business operations, the Company enters into long termlong-term debt arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and amount of the Company's long termlong-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations. The Company utilizes interest rate swap contracts to convert a portion of variable rate debt to fixed rate debt. The contracts pay fixed and receive variable rates of interest. The interest rate swap contracts are accounted for as cash flow hedges. 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 49 of the Condensed Consolidated Financial Statements for a discussion of long termlong-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 Statement 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 SeptemberJune 30, 2017,2023, 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$430.0 million and $0.5 million increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. During the nine months ended September 30, 2017 and 2016, the Company recorded a $0.8 million and $1.6 million increase in interest expense, respectively, representing the effective portion of the contract reclassified from accumulated other comprehensive income. The fair values of the interest rate swap contracts were assets of $0.2 million and $4.0 million as of September 30, 2017 and 2016, respectively, and were included in other long term assets on the consolidated balance sheet. The fair value of the interest rate swap contracts was a liability of $0.4 million as of December(March 31, 2016, and was included in other long term liabilities on the consolidated balance sheet.2023: $396.7 million).
Credit Risk
The Company enters into derivative contracts with major financial institutions with investment grade credit ratings and is exposed to credit losses in the event of non-performance by these financial institutions. This credit risk is generally limited to the unrealized gains in the derivative contracts. However, the Company monitors the
credit quality of these financial institutions and considers the risk of counterparty default to be minimal.
NOTE 17. PROVISION FOR INCOME TAXES
9. ProvisionFor the period ended June 30, 2023, the Company computes its quarterly income tax provision under the effective tax rate method by applying an estimated anticipated annual effective rate to the Company's year-to-date earnings, 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 earnings in the loss jurisdiction. Income Taxestax provision 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 30.7% and 39.7% for the ninethree months ended SeptemberJune 30, 2017 from $80.3 million during2023 and 2022, respectively. The decrease in the same period in 2016. For the nine months ended September 30, 2017, the Company'sCompany’s effective tax rate was (3.5%) compared to 34.3% forprimarily driven by the samelapping of discrete items in the period in 2016. The effective tax rate for the nine months ended SeptemberJune 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 2017,2022, partially offset by non-deductible goodwill impairment charges anda reduction in tax benefits attributable to valuation allowance releases in the recording of certain valuation allowances.period ended June 30, 2023 compared to the period ended June 30, 2022.
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 2023, a significant portion of the Company’s deferred tax assets relate to United States state taxing jurisdictions. Realization of these deferred tax assets is dependent on future United States pre-tax earnings. As of June 30, 2023, 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 state deferred tax assets. Accordingly, the Company continues to maintain a valuation allowance on these deferred tax assets. Furthermore, 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 a portion of the state 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 a portion or all of previously recorded state 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 Share
NOTE 18. EARNINGS PER SHARE
The following represents a reconciliation from basic earningsnet income (loss) per share to diluted earningsnet income (loss) per share: | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2023 | | 2022 |
| Numerator | | | |
| Net income (loss) - Basic | $ | 8,549 | | | $ | 7,682 | |
| Interest on Convertible Senior Notes due 2024, net of tax | 225 | | | 225 | |
| Net income (loss) - Diluted | $ | 8,774 | | | $ | 7,907 | |
| Denominator | | | |
| Weighted average common shares outstanding Class A, B and C - Basic | 444,872 | | | 458,415 | |
| Dilutive effect of Class A, B, and C securities | 1,392 | | | 1,510 | |
| Dilutive effect of Convertible Senior Notes due 2024 | 8,242 | | | 8,242 | |
| Weighted average common shares and dilutive securities outstanding Class A, B, and C | 454,506 | | | 468,167 | |
| | | |
Class A and Class C securities excluded as anti-dilutive (1) | 22,592 | | | 8,458 | |
| | | |
| Basic net income (loss) per share of Class A, B and C common stock | $ | 0.02 | | | $ | 0.02 | |
| Diluted net income (loss) per share of Class A, B and C common stock | $ | 0.02 | | | $ | 0.02 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands, except per share amounts) | 2017 | | 2016 | | 2017 | | 2016 |
| Numerator | | | | | | | |
| Net income | $ | 54,242 |
| | $ | 128,225 |
| | $ | 39,660 |
| | $ | 153,748 |
|
| Adjustment payment to Class C capital stockholders | — |
| | — |
| | — |
| | 59,000 |
|
| Net income available to all stockholders | $ | 54,242 |
| | $ | 128,225 |
| | $ | 39,660 |
| | $ | 94,748 |
|
| Denominator | | | | | | | |
| Weighted average common shares outstanding Class A and B | 219,491 |
| | 218,074 |
| | 219,125 |
| | 217,535 |
|
| Effect of dilutive securities Class A and B | 3,357 |
| | 4,041 |
| | 3,746 |
| | 4,174 |
|
| Weighted average common shares and dilutive securities outstanding Class A and B | 222,848 |
| | 222,115 |
| | 222,871 |
| | 221,709 |
|
| | | | | | | | |
| Weighted average common shares outstanding Class C | 221,784 |
| | 219,756 |
| | 221,235 |
| | 218,147 |
|
| Effect of dilutive securities Class C | 3,807 |
| | 3,982 |
| | 4,155 |
| | 4,154 |
|
| Weighted average common shares and dilutive securities outstanding Class C | 225,591 |
| | 223,738 |
| | 225,390 |
| | 222,301 |
|
| | | | | | | | |
| Basic net income per share of Class A and B common stock | $ | 0.12 |
| | $ | 0.29 |
| | $ | 0.09 |
| | $ | 0.22 |
|
| Basic net income per share of Class C common stock | $ | 0.12 |
| | $ | 0.29 |
| | $ | 0.09 |
| | $ | 0.49 |
|
| Diluted net income per share of Class A and B common stock | $ | 0.12 |
| | $ | 0.29 |
| | $ | 0.09 |
| | $ | 0.21 |
|
| Diluted net income per share of Class C common stock | $ | 0.12 |
| | $ | 0.29 |
| | $ | 0.09 |
| | $ | 0.48 |
|
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock(1) 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 items from its segment profitability measures. The Company reports these items within Corporate Other, which is designed to provide increased transparency and comparability of the Company's operating segments' performance. Corporate Other consists primarily of (i) operating results related to MMR platforms and other digital business opportunities; (ii) general and administrative expenses not allocated to an operating segment, including expenses associated with centrally managed departments which include global marketing, global IT, global supply chain and innovation, and other corporate support functions; (iii) restructuring and restructuring related charges; and (iv) 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 June 30, |
| 2023 | | 2022 |
| Net revenues | | | |
| North America | $ | 826,652 | | | $ | 909,356 | |
| EMEA | 226,641 | | | 205,181 | |
| Asia-Pacific | 202,232 | | | 176,665 | |
| Latin America | 55,739 | | | 49,443 | |
| Corporate Other | 5,748 | | | 8,412 | |
| Total net revenues | $ | 1,317,012 | | | $ | 1,349,057 | |
| | | | | | | | | | | |
| Three Months Ended June 30, |
| 2023 | | 2022 |
| Operating income (loss) | | | |
| North America | $ | 158,051 | | | $ | 189,924 | |
| EMEA | 30,949 | | | 18,181 | |
| Asia-Pacific | 15,398 | | | 19,945 | |
| Latin America | 5,777 | | | 6,234 | |
| Corporate Other | (189,245) | | | (199,801) | |
| Total operating income (loss) | 20,930 | | | 34,483 | |
| Interest expense, net | (1,626) | | | (6,005) | |
| Other income (expense), net | (6,385) | | | (14,241) | |
| Income (loss) before income taxes | $ | 12,919 | | | $ | 14,237 | |
|
| | | | | | | | | | | | | | | |
| | 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 and in our Annual Report on Form 10-K for Fiscal 2023, filed with the Securities Exchange Commission ("SEC") on May 24, 2023, 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 months ended June 30, 2023 compared with the three months ended June 30, 2022, unless otherwise noted.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Quarterly Report on 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, expectations regarding promotional activities, freight, product cost pressures and foreign currency impacts, the impact of global economic conditions and inflation on our anticipated charges and restructuring costs and the timingresults of these measures,operations, the development and introduction of new products, the implementation of our marketing and branding strategies, andthe future benefits and opportunities from acquisitionssignificant investments and the impact of litigation or other significant investments.proceedings. 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 Quarterly Report on 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 2023. These factors include without limitation:limitation:
•changes in general economic or market conditions, including increasing inflation, that could affect overall consumer spending or our industry;
changes to •the impact of the COVID-19 pandemic on our industry and our business, financial healthcondition and results of operations, including recent impacts on the global supply chain;
•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, including those discussed in this Quarterly Report on Form 10-Q.
our ability to attract key talent and retain the services of senior management and key employees.
The forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our views and assumptions only as of the date of this Quarterly Report on 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
Strategically and operationally, we remain focused on driving premium brand-right growth and improved profitability. We plan to continue to grow our business over the world's largestlong-term through increased sales of our apparel, footwear and accessories; growth in our direct-to-consumer sales channel; and expansion of our wholesale distribution. We believe that achievement of our long-term growth objectives depends, in part, on our ability to execute strategic initiatives in key areas including our wholesale, footwear, women’s and direct-to-consumer businesses. Additionally, our digital health and fitness community and our strategy is focused on engagingsupporting these long-term objectives, emphasizing connection and engagement with these consumers and increasing awareness and sales of our products. We plan to grow this community by developing innovative applications, services and other digital solutions to impact how athletes and fitness-minded individuals train, perform and live.
Our net revenues grew to $4,825.3 million in 2016 from $1,834.9 million in 2012. We believe that our growth in net revenues has been driven by increasing consumer interest in our products and the strength of the Under Armour brand in the market place. Our long-term growth strategy is focused on increased sales of our products through ongoing product innovation, investment in our distribution channels, international expansion and engaging with consumers through our Connected Fitness business. Whilemultiple digital touchpoints.
During the three months ended June 30, 2023, we planfaced a challenging retail environment, particularly in North America, that included higher promotions and discounting related to continue to invest in growth, we also plan to improve efficiencies throughout our business as we seek to gain scale through our operations and return on our investments.industry-wide elevated inventory balances.
Quarterly Results
Financial highlights for the three months ended SeptemberJune 30, 20172023 as compared to the prior year periodthree months ended June 30, 2022 include:
Net•Total net revenues decreased 4.5%2.4%.
Wholesale•Within our channels, wholesale revenue decreased 13.2%6.3% and Direct to Consumerdirect-to-consumer revenue increased 14.6%4.5%.
Apparel•Within our product categories, apparel revenue decreased8.0%. Footwear 5.0%, footwear revenue increased 4.7%, and accessories revenues grew 2.2% and 1.4%, respectively.
revenue increased 1.1%.Revenue•Net revenue decreased 9.1% in our North America, segmentincreased 10.5% in the Europe, Middle East and Africa ("EMEA"), increased 14.5% in Asia-Pacific, and increased 12.7% in Latin America.
•Gross margin decreased 12.1%60 basis points to 46.1%. 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%1.5%.
Gross margin decreased 160 basis points.Effects of Inflation and Other Global Events
On July 27, 2017,Macroeconomic factors, such as inflationary pressures and fluctuations in foreign currency exchange rates, have and may continue to impact our Board of Directors approved a restructuring plan (the “restructuring plan”)business. We continue to more closely alignmonitor these factors and the potential impacts they may have on our financial resources withresults, including product input costs, freight costs and consumer discretionary spending and therefore consumer demand for our critical prioritiesproducts. We also continue to monitor the broader impacts of the business. 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 original expectation wasbusiness depends on consumer purchases of discretionary items, which can be negatively impacted during an economic downturn or periods of inflation. This could materially impact our sales, profitability and financial condition"; "—Fluctuations in the cost of raw materials and commodities we use in our products and costs related to incur estimated pre-tax restructuringour 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 2023.
Additionally, the COVID-19 pandemic has in prior periods caused, and a resurgence could cause, disruption and volatility in our business and in the businesses of our wholesale customers, licensing partners, suppliers, logistics providers and vendors. As of June 30, 2023, we continue to see improvements across our supply chain, including progress towards a return to pre-pandemic production efficiency and improving freight costs. For a more complete discussion of the COVID-19 related chargesrisks facing our business, refer to our "Risk Factors" section included in Item 1A of approximately $110.0 to $130.0 millionour Annual Report on Form 10-K for Fiscal 2023.
RESULTS OF OPERATIONS
The following tables set forth key components of our results of operations for the year ended December 31, 2017. In the third quarterperiods indicated, both in dollars and as a percentage of 2017, we recognized approximately $59.9 millionnet revenues:
| | | | | | | | | | | |
| (In thousands) | Three months ended June 30, |
| 2023 | | 2022 |
| Net revenues | $ | 1,317,012 | | | $ | 1,349,057 | |
| Cost of goods sold | 709,276 | | | 718,860 | |
| Gross profit | 607,736 | | | 630,197 | |
| Selling, general and administrative expenses | 586,806 | | | 595,714 | |
| Income (loss) from operations | 20,930 | | | 34,483 | |
| Interest income (expense), net | (1,626) | | | (6,005) | |
| Other income (expense), net | (6,385) | | | (14,241) | |
| Income (loss) before income taxes | 12,919 | | | 14,237 | |
| Income tax expense (benefit) | 3,971 | | | 5,657 | |
| Income (loss) from equity method investments | (399) | | | (898) | |
| Net income (loss) | $ | 8,549 | | | $ | 7,682 | |
| | | | | | | | | | | |
| Three months ended June 30, |
| (As a percentage of net revenues) | 2023 | | 2022 |
| Net revenues | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 53.9 | % | | 53.3 | % |
| Gross profit | 46.1 | % | | 46.7 | % |
| Selling, general and administrative expenses | 44.6 | % | | 44.2 | % |
| Income (loss) from operations | 1.6 | % | | 2.6 | % |
| Interest income (expense), net | (0.1) | % | | (0.4) | % |
| Other income (expense), net | (0.5) | % | | (1.1) | % |
| Income (loss) before income taxes | 1.0 | % | | 1.1 | % |
| Income tax expense (benefit) | 0.3 | % | | 0.4 | % |
| Loss from equity method investment | — | % | | (0.1) | % |
| Net income (loss) | 0.6 | % | | 0.6 | % |
GeneralRevenues
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 FitnessThe following tables summarize net revenues consistby product category and distribution channel for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, |
| (In thousands) | 2023 | | 2022 | | Change ($) | | Change (%) |
| Net Revenues by Product Category | | | | | | | |
| Apparel | $ | 824,660 | | | $ | 868,428 | | | $ | (43,768) | | | (5.0) | % |
| Footwear | 363,670 | | | 347,251 | | | 16,419 | | | 4.7 | % |
| Accessories | 97,862 | | | 96,831 | | | 1,031 | | | 1.1 | % |
| Net Sales | 1,286,192 | | | 1,312,510 | | | (26,318) | | | (2.0) | % |
| License revenues | 25,072 | | | 28,135 | | | (3,063) | | | (10.9) | % |
Corporate Other (1) | 5,748 | | | 8,412 | | | (2,664) | | | (31.7) | % |
| Total net revenues | $ | 1,317,012 | | | $ | 1,349,057 | | | $ | (32,045) | | | (2.4) | % |
| | | | | | | |
| Net Revenues by Distribution Channel | | | | | | | |
| Wholesale | $ | 741,958 | | | $ | 791,686 | | | $ | (49,728) | | | (6.3) | % |
| Direct-to-consumer | 544,234 | | | 520,824 | | | 23,410 | | | 4.5 | % |
| Net Sales | 1,286,192 | | | 1,312,510 | | | (26,318) | | | (2.0) | % |
| License revenues | 25,072 | | | 28,135 | | | (3,063) | | | (10.9) | % |
Corporate Other (1) | 5,748 | | | 8,412 | | | (2,664) | | | (31.7) | % |
| Total net revenues | $ | 1,317,012 | | | $ | 1,349,057 | | | $ | (32,045) | | | (2.4) | % |
(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.
Net Sales
Net sales decreased by $26.3 million, or 2.0%, to $1,286.2 million during the three months ended June 30, 2023 from $1,312.5 million during the three months ended June 30, 2022. Apparel decreased primarily due to lower unit sales and the impact of digital advertising, digital fitness platform licensesforeign exchange rates, partially offset by higher average selling prices and subscriptionsfavorable channel mix. Footwear increased primarily due to higher unit sales. Accessories increased primarily due to favorable channel mix. From a channel perspective, the decrease in net sales was due to a decrease in wholesale, partially offset by an increase in direct-to-consumer.
License Revenues
License revenues decreased by $3.1 million or 10.9%, to $25.1 million during the three months ended June 30, 2023, from $28.1 million during the three months ended June 30, 2022. This was primarily due to lower revenues from our Connected Fitness business.Japanese licensee and from our licensing partners in the North America region.
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 million and $25.7$18.4 million for the three months ended SeptemberJune 30, 2017 and 2016, respectively, and $74.5 million and $65.1 million for the nine2023 (three months ended SeptemberJune 30, 20172022: $17.9 million).
Gross profit decreased by $22.5 million to $607.7 million during the three months ended June 30, 2023, as compared to $630.2 million during the three months ended June 30, 2022. Gross profit as a percentage of net revenues, or gross margin, decreased to 46.1% from 46.7%. This decrease in gross margin of 60 basis points was primarily driven by negative impacts of approximately:
•300 basis points from higher promotional activity within our direct-to-consumer channel and 2016, respectively.unfavorable pricing of sales to the off-price channel;
•70 basis points from changes in foreign currency; and
•30 basis points from unfavorable product and regional mix.
These negative impacts were partially offset by positive impacts of approximately:
•320 basis points of supply chain impacts mainly due to lower freight costs; and
•20 basis points from favorable channel impacts.
We expect discounting and promotional activities to continue to negatively impact our gross margin in the near term.
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 relatedbrand 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 June 30, |
| (In thousands) | 2023 | | 2022 | | Change ($) | | Change (%) |
| Selling, General and Administrative Expenses | $ | 586,806 | | | $ | 595,714 | | | $ | (8,908) | | | (1.5) | % |
Selling, general and administrative expenses decreased by $8.9 million, or 1.5%, during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Within selling, general and administrative expense:
•Marketing costs consistdecreased $13.9 million or 9.1%, due to a reduction in marketing activities during the period. As a percentage of net revenues, marketing costs decreased to 10.6% from 11.4%.
•Other costs increased $5.0 million or 1.1%, primarily driven by higher salaries, incentive compensation expenses and distribution and selling expenses, partially offset by lower non-salaried wages, litigation accrual, and consulting expenses. As a percentage of commercials, print ads, league, team, playernet revenues, other costs increased to 34.0% from 32.8%.
As a percentage of net revenues, selling, general and event sponsorshipsadministrative expenses increased to 44.6% during the three months ended June 30, 2023 as compared to 44.2% during the three months ended June 30, 2022.
Interest Expense, net
Interest expense, net is primarily comprised of interest incurred on our debt facilities, offset by interest income earned on our cash and depreciationcash equivalents.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, |
| (In thousands) | 2023 | | 2022 | | Change ($) | | Change (%) |
| Interest expense, net | $ | 1,626 | | | $ | 6,005 | | | $ | (4,379) | | | (72.9) | % |
Interest expense, specificnet decreased by $4.4 million to $1.6 million during the three months ended June 30, 2023. This was primarily due to an increase in interest income as a result of higher interest rates. See Note 9 to our in-store fixture program for our concept shops.Condensed Consolidated Financial Statements.
Other expense,Income (Expense), net
Other income (expense), net primarily consists of unrealized and realized gains and losses on our foreign currency derivative financial instruments, and unrealized and realized gains and losses on adjustments that arise from fluctuations in foreign currency exchange rates relating to transactions generated by our international subsidiaries. Other income (expense), net also includes rent expense relating to lease assets held solely for sublet purposes, primarily the lease related to our New York City, 5th Avenue location.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, |
| (In thousands) | 2023 | | 2022 | | Change ($) | | Change (%) |
| Other income (expense), net | $ | (6,385) | | | $ | (14,241) | | | $ | 7,856 | | | 55.2 | % |
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 Compareddecreased by $7.9 million to Three Months Ended September 30, 2016
Net revenues decreased$66.0$6.4 million or 4.5%, to $1,405.6 million forduring the three months ended SeptemberJune 30, 20172023. This was primarily due to a decrease in losses from $1,471.6changes in foreign currency exchange rates of $5.0 million and a decrease in losses on foreign currency hedges of $1.7 million.
Income Tax Expense (Benefit)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, |
| (In thousands) | 2023 | | 2022 | | Change ($) | | Change (%) |
| Income tax expense (benefit) | $ | 3,971 | | | $ | 5,657 | | | $ | (1,686) | | | (29.8) | % |
Income tax expense decreased $1.7 million to 4.0 million during the three months ended June 30, 2023 from income tax expense of 5.7 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 for2022. For the three months ended SeptemberJune 30, 2017 from $29.5 million during the same period in 2016 driven primarily by increased revenue from2023, our licensing partners in North America.
Connected Fitness revenue increased $3.2 million, or 15.9%,effective tax rate was 30.7% compared to $23.4 million for the three months ended September 30, 2017 from $20.2 million during the same period in 2016, primarily driven by an increase in partnership revenue.
Gross profit decreased $53.2 million to $645.4 million for the three months ended September 30, 2017 from $698.6 million39.7% 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 2016.2022. The decrease in gross margin percentagethe Company’s effective tax rate was primarily driven by the following:lapping of discrete items in the period ended June 30, 2022, partially offset by a reduction in tax benefits attributable to valuation allowance releases in the period ended June 30, 2023 compared to the period ended June 30, 2022.
approximate 100 basis point decrease due to inventory management strategies in
SEGMENT RESULTS OF OPERATIONS
Our operating segments are based on how our Chief Operating Decision Maker ("CODM") makes decisions about allocating resources and assessing performance. Our segments are defined by geographic regions, including North America, including pricingEMEA, Asia-Pacific, and a higher concentrationLatin America.
We exclude certain corporate items from our segment profitability measures. We report these items within Corporate Other, which is designed to provide increased transparency and comparability of salesour operating segments' performance. Corporate Other consists primarily of (i) operating results related 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 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 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,opportunities; (ii) general and administrative expenses decreased$1.1 millionnot allocated to $498.2 million for the three months ended September 30, 2017 from $499.3 million for the same period in 2016. Within selling, generalan operating segment, including expenses associated with centrally managed departments which include global marketing, global IT, global
supply chain 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 personnelinnovation, 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 ofcorporate support functions; (iii) restructuring and impairment charges in connection with the restructuring plan.
Interest expense, net increased $1.4 million to $9.6 million for the three months ended September 30, 2017 from $8.2 million for the same period in 2016. This increase was primarily due to an increase in borrowing on our revolving credit facility.
Other expense, net increased $0.3 million to expense of $1.1 million for the three months ended September 30, 2017 from expense of $0.8 million for the same period in 2016.
Provision for income taxes decreased $64.8 million to a benefit of $2.7 million during the three months ended September 30, 2017 from $62.1 million during the same period in 2016. For the three months ended September 30, 2017, our effective tax rate was (5.3)% compared to 32.6% for the same period in 2016. The effective tax rate for the three months ended September 30, 2017 was lower than the effective tax rate for the three months ended September 30, 2016, primarily due to challenged results in North America creating a higher proportion of international profits in 2017, partially offset by non-deductible goodwill impairment charges (See Note 3 to our Consolidated Financial Statements)related charges; and the recording of(iv) certain valuation allowances.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Net revenues increased $91.1 million, or 2.6%, to $3,611.2 million for the nine months ended September 30, 2017 from $3,520.1 million during the same period in 2016. Net revenues by product category are summarized below:
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change |
| Apparel | $ | 2,335,454 |
| | $ | 2,300,596 |
| | $ | 34,858 |
| | 1.5 | % |
| Footwear | 791,637 |
| | 785,843 |
| | 5,794 |
| | 0.7 | % |
| Accessories | 335,172 |
| | 302,267 |
| | 32,905 |
| | 10.9 | % |
| Total net sales | 3,462,263 |
| | 3,388,706 |
| | 73,557 |
| | 2.2 | % |
| License revenues | 83,639 |
| | 69,923 |
| | 13,716 |
| | 19.6 | % |
| Connected Fitness | 65,290 |
| | 62,179 |
| | 3,111 |
| | 5.0 | % |
| Intersegment eliminations | — |
| | (750 | ) | | 750 |
| | 100.0 | % |
| Total net revenues | $ | 3,611,192 |
| | $ | 3,520,058 |
| | $ | 91,134 |
| | 2.6 | % |
The increase in net sales was driven primarily by:
Apparel unit sales growth in men's trainingforeign currency hedge gains and golf, partially offset by unit sales decline in outdoor;
Footwear unit sales growth in run, partially offset by unit sales decline in basketball; and
Accessories unit sales growth led by men's training.
License revenues increased $13.7 million, or 19.6%, to $83.6 million during the nine months ended September 30, 2017 from $69.9 million during the same period in 2016, driven primarily by increased revenue from our licensing partners in North America.
Connected Fitness revenue increased $3.1 million, or 5.0%, to $65.3 million during the nine months ended September 30, 2017 from $62.2 million during the same period in 2016, primarily driven by a increases in paid subscribers and an increase in advertising and partnership revenues, partially offset by a decrease in hardware sales as we discontinued connected hardware sales as part of our restructuring plan.
Gross profit decreased $7.9 million to $1,649.0 million for the nine months ended September 30, 2017 from $1,656.9 million for the same period in 2016. Gross profit as a percentage of net revenues, or gross margin, decreased140 basis points to 45.7% for the nine months ended September 30, 2017 compared to 47.1% for the same period in 2016. The decrease in gross margin percentage was primarily driven by the following:
approximate 90 basis point decrease due to inventory management and pricing strategies in North America, which we expect to continue for the remainder of the year;
approximate 50 basis point decrease driven by higher air freight;
approximate 30 basis point decrease due to our international business representing a higher percentage of sales, which we expect to continue for the remainder of the year; and;
approximate 20 basis point decrease driven by the strengthening of the U.S. dollar negatively impacting our gross margins within our businesses outside of the United States.
The above decreases were partially offset by:
approximate 50 basis point increase driven by favorable sales channel mix due to higher direct to consumer sales as a percentage of total sales, which we expect to continue for the remainder of the year.
Selling, general and administrative expenses increased$92.7 million to $1,496.0 million for the nine months ended September 30, 2017 from $1,403.3 million for the same period in 2016. As a percentage of net revenues, selling, general and administrative expenses increased to 41.4% for the nine months ended September 30, 2017, compared to 39.9% for the same period in 2016. Within in selling, general and administrative expense:
Marketing costs increased $38.5 million to $408.3 million for the nine months ended September 30, 2017 from $369.8 million for the same period in 2016. This increase was primarily due to the timing of marketing expenses related to investments in our collegiate and professional athlete sponsorships and increased marketing in connection with the growth of our international business, partially offset by decreased marketing spend in our North America direct-to-consumer business. As a percentage of net revenues, marketing costs increased to 11.3% for the nine months ended September 30, 2017 from 10.5% for the same period in 2016.
Other costs increased $54.2 million to $1,087.7 million for the nine months ended September 30, 2017 from $1,033.5 million for the same period in 2016. This increase was primarily due to higher personnel and other costs incurred for the continued expansion of our direct to consumer distribution channel, which was partially offset by the reversal of incentive compensation accruals. Other costs for the nine months ended September 30, 2016 included $24.5 million of expense related to the bankruptcy and liquidation of one of our wholesale customers. As a percentage of net revenues, other costs increased to 30.1% for the nine months ended September 30, 2017, from 29.4% for the same period in 2016.
Income from operations decreased$188.7 million to $64.9 million for the nine months ended September 30, 2017 from $253.6 million for the same period in 2016, and as a percentage of net revenues decreased to 1.8% for the nine months ended September 30, 2017 from 7.2% for the same period in 2016. Income from operations for the nine months ended September 30, 2017 was negatively impacted by $88.1 million of restructuring and impairment charges in connection with the restructuring plan.
Interest expense, net increased $6.7 million to $25.2 million for the nine months ended September 30, 2017 from $18.5 million for the same period in 2016. This increase was primarily due to interest on the $600 million in Senior Notes issued in June of 2016 and an increase in borrowing on our revolving credit facility.
Other expense, net increased $0.4 million to $1.4 million for the nine months ended September 30, 2017 from$1.0 million for the same period in 2016.
Provision for income taxes decreased$81.6 million to a benefit of $1.3 million during the nine months ended September 30, 2017 from $80.3 million of expense during the same period in 2016. For the nine months ended September 30, 2017, our effective tax rate was (3.5)% compared to 34.3% for the same period in 2016. The effective tax rate for the nine months ended September 30, 2017 was lower than the effective tax rate for the nine months ended September 30, 2016, primarily due to challenged results in North America creating a higher proportion of international profits in 2017, partially offset by non-deductible goodwill impairment charges (see Note 3 to our Consolidated Financial Statements) and the recording of certain valuation allowances.
Segment Results of Operationslosses.
The net revenues and operating income (loss) associated with our segments are summarized in the following tables. The majority of corporate expenses within North America have not been allocated
Net Revenues
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, |
| (In thousands) | 2023 | | 2022 | | Change ($) | | Change (%) |
| North America | $ | 826,652 | | | $ | 909,356 | | | $ | (82,704) | | | (9.1) | % |
| EMEA | 226,641 | | | 205,181 | | | 21,460 | | | 10.5 | % |
| Asia-Pacific | 202,232 | | | 176,665 | | | 25,567 | | | 14.5 | % |
| Latin America | 55,739 | | | 49,443 | | | 6,296 | | | 12.7 | % |
Corporate Other (1) | 5,748 | | | 8,412 | | | (2,664) | | | (31.7) | % |
| Total net revenues | $ | 1,317,012 | | | $ | 1,349,057 | | | $ | (32,045) | | | (2.4) | % |
(1)Corporate Other primarily includes foreign currency hedge gains and losses related to our other segments. Intersegment revenue isrevenues generated by Connected Fitness which runs advertising campaigns forentities 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 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.digital business opportunities.
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
Net revenues by segment are summarized below:
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change |
| North America | $ | 1,077,088 |
| | $ | 1,225,188 |
| | $ | (148,100 | ) | | (12.1 | )% |
| EMEA | 127,932 |
| | 105,099 |
| | 22,833 |
| | 21.7 | % |
| Asia-Pacific | 130,320 |
| | 85,810 |
| | 44,510 |
| | 51.9 | % |
| Latin America | 46,887 |
| | 35,295 |
| | 11,592 |
| | 32.8 | % |
| Connected Fitness | 23,388 |
| | 20,181 |
| | 3,207 |
| | 15.9 | % |
| Total net revenues | $ | 1,405,615 |
| | $ | 1,471,573 |
| | $ | (65,958 | ) | | (4.5 | )% |
The decrease in total net revenues for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, was driven by the following:
•Net revenues in our North America operating segmentregion decreased $148.1by $82.7 million, or 9.1%, to $1,077.1$826.7 million for the three months ended September 30, 2017 from $1,225.2 million for the same period$909.4 million. This was driven by a decrease in 2016 primarily due to lower sales inboth our wholesale channel driven byand our direct-to-consumer channel. Within our direct-to-consumer channel, net revenues were lower demanddue to a decrease in owned and operational challenges.operated retail store sales and e-commerce sales were flat.
•Net revenues in our EMEA operating segmentregion increased $22.8by $21.5 million, or 10.5%, to $127.9$226.6 million for the three months ended September 30, 2017 from $105.1 million for the same period$205.2 million. This was primarily driven by an increase in 2016 primarily due to unitboth our wholesale channel and our direct-to-consumer channel. Within our direct-to-consumer channel, net revenues increased in both owned and operated retail store sales growth to wholesale partners in the United Kingdom and Germany.e-commerce sales.
•Net revenues in our Asia-Pacific operating segmentregion increased $44.5by $25.6 million, or 14.5%, to $130.3$202.2 million forfrom $176.7 million. This was driven by an increase in both our direct-to-consumer channel and our wholesale channel. Within our direct-to-consumer channel, net revenues increased in both owned and operated retail store sales and e-commerce sales, partly due to the negative impacts of the COVID-19 related restrictions during the three months ended SeptemberJune 30, 2017 from $85.8 million for the same period2022, which included temporary closures of our owned and operated stores and distribution centers in 2016 primarily due to store growthChina. Net revenues in China and South Korea.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 $6.3 million, or 12.7%, 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$55.7 million from $20.2 million for the same period in 2016$49.4 million. This was primarily driven by an increase in partnership revenue.both our wholesale channel and our direct-to-consumer channel. Within our direct-to-consumer channel, net revenues increased both in owned and operated retail store sales and e-commerce sales. Net revenues in our Latin America region were also positively impacted by changes in foreign exchange rates.
Operating income (loss)•Net revenues in our Corporate Other non-operating segment decreased by segment is summarized below:$2.7 million to $5.7 million from $8.4 million. This was primarily driven by lower foreign currency hedge gains related to revenues generated by entities within our operating segments.
|
| | | | | | | | | | | | | | |
| | 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 June 30, |
| (In thousands) | 2023 | | 2022 | | Change ($) | | Change (%) |
| North America | $ | 158,051 | | | $ | 189,924 | | | $ | (31,873) | | | (16.8) | % |
| EMEA | 30,949 | | | 18,181 | | | 12,768 | | | 70.2 | % |
| Asia-Pacific | 15,398 | | | 19,945 | | | (4,547) | | | (22.8) | % |
| Latin America | 5,777 | | | 6,234 | | | (457) | | | (7.3) | % |
Corporate Other (1) | (189,245) | | | (199,801) | | | 10,556 | | | 5.3 | % |
| Total operating income (loss) | $ | 20,930 | | | $ | 34,483 | | | $ | (13,553) | | | (39.3) | % |
(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 for three months ended June 30, 2023, compared to the three months ended June 30, 2022, was primarily driven by the following:
•Operating income in our North America operating segmentregion decreased $117.0by $31.9 million to $65.8$158.1 million operating income for the three months ended September 30, 2017 from $182.8 million for the same period in 2016$189.9 million. This was primarily due to the decreasesa decline in gross profit, partially offset by lower marketing-related expenses. The decline in gross profit was driven by increased promotions and discounting and lower net sales and gross marginrevenues as discussed above, in the Consolidated Results of Operationspartially offset by lower product input and $31.0 million in restructuring and impairment charges.freight costs.
•Operating income in our EMEA operating segmentregion increased $8.6by $12.8 millionto $17.0$30.9 million for the three months ended September 30, 2017 from $8.4 million for the same period in 2016$18.2 million. This was primarily due the sales growthto an increase in gross profit and lower marketing related expenses, partially offset by higher distribution and selling expenses. The increase in gross profit was driven by higher net revenues as discussed above.
above and lower freight costs.•Operating income in our Asia-Pacific operating segment increased$7.0region decreased by $4.5 million to $34.2$15.4 million for the three months ended September 30, 2017 from $27.2 million for the same period in 2016$19.9 million. This was primarily due to the sales growth discussed above. This increase washigher marketing-related expenses and higher distribution and selling expenses, partially offset by investmentsan increase in our direct to consumer business and entry into new territories.
Operating lossgross profit. The increase in our Latin America operating segment decreased $0.3 million to $10.2 million for the three months ended September 30, 2017 from $10.6 million for the same period in 2016 primarily due to the sales growthgross profit was driven by higher net revenues as discussed above, partially offset by $6.0increased promotions and discounting.
•Operating income in our Latin America region decreased by $0.5 million to $5.8 million from $6.2 million. This was primarily due to higher distribution costs, partially offset by an increase in restructuring and impairment chargesgross profit, driven by higher net revenues as discussed above.
•Operating loss in our Connected FitnessCorporate Other non-operating segment increased $36.1decreased by $10.6 million to $44.6$189.2 million for the three months ended September 30, 2017 from $8.5 million for the same period in 2016 $199.8 million. This was primarily due to $47.8 million in restructuring and impairment charges.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Net revenues by segment are summarized below:
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change |
| North America | $ | 2,778,165 |
| | $ | 2,932,915 |
| | $ | (154,750 | ) | | (5.3 | )% |
| EMEA | 334,683 |
| | 237,559 |
| | 97,124 |
| | 40.9 | % |
| Asia-Pacific | 309,712 |
| | 188,985 |
| | 120,727 |
| | 63.9 | % |
| Latin America | 123,342 |
| | 99,170 |
| | 24,172 |
| | 24.4 | % |
| Connected Fitness | 65,290 |
| | 62,179 |
| | 3,111 |
| | 5.0 | % |
| Intersegment eliminations | — |
| | (750 | ) | | 750 |
| | 100.0 | % |
| Total net revenues | $ | 3,611,192 |
| | $ | 3,520,058 |
| | $ | 91,134 |
| | 2.6 | % |
The increase in total net revenues was driven by the following:
Net revenuesa decrease in our North America operating segment decreased $154.8 millionto $2,778.2 million for the nine months ended September 30, 2017litigation accrual and consulting expenses, and gains arising from $2,932.9 million for the same period in 2016 primarily due to lower sales in our wholesale channel drivenforeign currency hedges, partially offset by lower demand and operational challenges.
Net revenues in our EMEA operating segment increased $97.1 million to $334.7 million for the nine months ended September 30, 2017 from $237.6 million for the same period in 2016 primarily due to unit sales growth to wholesale partners in the United Kingdom and Germany.
Net revenues in our Asia-Pacific operating segment increased $120.7 million to $309.7 million for the nine months ended September 30, 2017 from $189.0 million for the same period in 2016 primarily due to store growth in China and South Korea.
Net revenues in our Latin America operating segment increased $24.2 million to $123.3 million for the nine months ended September 30, 2017 from $99.2 million for the same period in 2016 primarily due to unit sales growth to wholesale partners and through our direct to consumer channels in Mexico, Chile, and Brazil.
Net revenues in our Connected Fitness operating segment increased $3.1 million to $65.3 million for the nine months ended September 30, 2017 from $62.2 million for the same period in 2016 primarily driven by a increases in paid subscribers and an increase in advertisingsalaries and partnership revenues partially offset by a decrease in hardware sales.incentive compensation expenses.
Operating income (loss) by segment is summarized below: |
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | | $ Change | | % Change |
| North America | $ | 64,124 |
| | $ | 251,084 |
| | $ | (186,960 | ) | | (74.5 | )% |
| EMEA | 13,990 |
| | 8,348 |
| | 5,642 |
| | 67.6 | % |
| Asia-Pacific | 69,050 |
| | 54,399 |
| | 14,651 |
| | 26.9 | % |
| Latin America | (26,175 | ) | | (27,751 | ) | | 1,576 |
| | 5.7 | % |
| Connected Fitness | (56,058 | ) | | (32,509 | ) | | (23,549 | ) | | (72.4 | )% |
| Total operating income | $ | 64,931 |
| | $ | 253,571 |
| | $ | (188,640 | ) | | (74.4 | )% |
The decrease in total operating income was driven by the following:
Operating income in our North America operating segment decreased $187.0 million to $64.1 million for the nine months ended September 30, 2017 from $251.1 million for the same period in 2016 primarily due to the decreases in net sales and gross margin discussed above in the Consolidated Results of Operations and $33.6 million in restructuring and impairment charges. Operating income in our North America operating segment for the nine months ended September 30, 2016 was negatively impacted by $24.5 million of expense related to the liquidation of one of our wholesale customers.
Operating income in our EMEA operating segment increased $5.6 million to $14.0 million for the nine months ended September 30, 2017 from $8.3 million for the same period in 2016 primarily due sales growth discussed above, which was partially offset by costs related to a distributor termination.
Operating income in our Asia-Pacific operating segment increased$14.7 millionto $69.1 million for the nine months ended September 30, 2017 from $54.4 million for the same period in 2016 primarily due to the sales growth discussed above. This increase was offset by investments in our direct to consumer business and entry into new territories.
Operating loss in our Latin America operating segment decreased $1.6 million to $26.2 million for the nine months ended September 30, 2017 from $27.8 million for the same period in 2016 primarily due to the sales growth discussed above partially offset by $6.5 million in restructuring and impairment charges.
Operating loss in our Connected Fitness segment increased $23.5 million to $56.1 million for the nine months ended September 30, 2017 from $32.5 million for the same period in 2016 primarily due to $47.8 million in restructuring and impairment charges.
Seasonality
Historically, we have recognized a majority of our net revenues and a significant portion of our income from operations in the last two quarters of the year, driven primarily by increased sales volume of our products during the fall selling season, including our higher priced cold weather products, along with a larger proportion of higher margin direct to consumer sales. The level of our working capital generally reflects the seasonality and growth in our business.
Financial Position, Capital Resources and 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 termlong-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 supportincluding construction of our growth,new global headquarters, 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, we strive to systems and processes, key areas of focus that we believe will enhance our inventory performance are addedby focusing on adding discipline around theproduct purchasing, of product,reducing production lead time reduction, and betterimproving planning and execution infor selling of excess inventory through our factory houseFactory House stores and other liquidation channels.
As of June 30, 2023, we had approximately $703.6 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 and reduce 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. AsIn 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 September 30, 2017, we had $1.0 billionour 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 remaining availability underDirectors authorized the repurchase of up to $500 million of our revolving credit facility. Although we believeClass C Common Stock over the following two years, and, as of the date of this Quarterly Report on Form 10-Q, we have adequaterepurchased a total of $425 million of our Class C Common Stock through accelerated share repurchase transactions.
If there are unexpected material impacts to our business in future periods from COVID-19 or other global macroeconomic factors and we need to raise or conserve additional cash to fund our operations, we may consider additional alternatives, including further reducing our expenditures, changing our investment strategies, reducing compensation costs, including through temporary reductions in pay and layoffs, limiting certain marketing and capital expenditures, and negotiating, extending or delaying payment terms with our customers and vendors. 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 and could require us to take certain of the liquidity preserving actions described above.
Refer to our "Risk Factors" section included in Item 1A of our Annual Report on Form 10-K for Fiscal 2023.
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.
No shares were repurchased under the share repurchase program during the three months ended June 30, 2023 (three months ended June 30, 2022: 6.7 million shares of Class C Common Stock repurchased and immediately retired).
As of the date of this Quarterly Report on Form 10-Q, we have repurchased a total of $425 million or 34.9 million outstanding shares of our Class C Common Stock under the share repurchase program.
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 |
|
| | | | | | | | | | | | | | | | | |
| Three months ended June 30, |
| (In thousands) | 2023 | | 2022 | | Change ($) |
| Net cash provided by (used in): | | | | | |
| Operating activities | $ | 1,031 | | | $ | 87,496 | | | $ | (86,465) | |
| Investing activities | 5,409 | | | (747) | | | 6,156 | |
| Financing activities | (1,234) | | | (24,359) | | | 23,125 | |
| Effect of exchange rate changes on cash and cash equivalents | (12,087) | | | (21,454) | | | 9,367 | |
| Net increase (decrease) in cash and cash equivalents | $ | (6,881) | | | $ | 40,936 | | | $ | (47,817) | |
Operating Activities
OperatingCash flows from operating activities consistdecreased by $86.5 million, as compared to the three months ended June 30, 2022, primarily driven by a decrease from changes in working capital of $94.2 million, partially offset by an increase in net income adjusted for certain non-cash items. Adjustments to net income forbefore the impact of 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$7.7 million.
The changes in reserves and allowances. In addition, operating cash flows includeworking capital were due to the effectfollowing outflows:
•$91.5 million from changes in operating assets and liabilities, principally inventories, accounts receivable, income taxes payable and receivable, prepaidaccrued expenses and other assets,liabilities;
•$49.5 million from changes in accounts payablepayable;
•$21.9 million from changes in customer refund liabilities; and accrued expenses.
Cash used•$6.0 million from changes in operating activities decreased $6.8 million to $29.2 million for the nine months ended September 30, 2017 from $36.0 million during the same period in 2016. The decrease in cash used in operating activities was due to a decrease in net cashinventories.
These outflows from operating assets and liabilities of $42.7 millionwere partially offset by an decrease in net income adjusted for non-cash items of $35.9 million. The decrease in cash outflows related tothe following working capital inflows:
•$54.5 million from changes in operating assetsaccounts receivable;
•$10.4 million from changes in other non-current assets; and liabilities period over period was primarily driven by:
an increase in the change in accounts receivable of $204.1•$8.9 million in the current period compared to the prior period, primarily due to the timing of cash collections from new customers; partially offset by
a decreasechanges in income taxes payable and receivable, of $127.2net; and
•$0.9 million from changes in prepaid expenses and a decrease in inventories of $57.2 million.other current assets.
Investing Activities
Cash used inflows provided by investing activities decreased $88.4increased by $6.2 million, as compared to $227.6 million for the ninethree months ended SeptemberJune 30, 2017 from $316.0 million for the same period in 2016, primarily due to lower capital expenditures.
Capital expenditures for the full year 2017 are expected to be approximately $300.0 million, comprised primarily of investments in our distribution centers and retail stores.
Financing Activities
Cash provided by financing activities decreased$145.4 million to $256.9 million for the nine months ended September 30, 2017 from $402.3 million for the same period in 2016.2022. This decrease was primarily due to lower borrowings ona higher earnout collected in connection with the sale of the MyFitnessPal platform, partially offset by an increase in capital expenditures.
Total capital expenditures during the three months ended June 30, 2023 were $39.6 million, or approximately 3% of net revenues, representing a $3.8 million increase from $35.7 million during the three months ended June 30, 2022. Our long-term operating principle for capital expenditures is to spend between 3% and 5% of annual net revenues as we invest in our revolving creditglobal direct-to-consumer, e-Commerce and digital businesses, information technology systems, distribution centers and our global offices, including our new global headquarters in the Baltimore Peninsula, an area of Baltimore, Maryland. During the three months ended June 30, 2023, we incurred capital expenditures of $16.3 million relating to the construction of our new global headquarters. As previously disclosed, our plans for our new headquarters have been designed in line with our long-term sustainability strategy and include 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 next few years to include investments incorporating sustainable and intelligent building design features into this facility.
Financing Activities
Cash flows used in financing activities decreased by $23.1 million, as compared to the three months ended June 30, 2022. During the three months ended June 30, 2022, we paid $25.0 million to repurchase shares of our Class C Common Stock through accelerated share repurchase programs. No shares were repurchased during the three months ended June 30, 2023. 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 SeptemberJune 30, 2017,2023 and March 31, 2023, 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 June 30, 2023, there was $4.3 million of letters of credit outstanding as(March 31, 2023: $4.4 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 SeptemberJune 30, 2017,2023, 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 SeptemberJune 30, 2017,2023, the commitment fee was 15.017.5 basis points.
1.50% Convertible Senior Notes
We have approximately $80.9 million aggregate principal amount of 1.50% convertible senior notes due 2024 (the "Convertible Senior Notes") outstanding as of June 30, 2023, which were issued in May 2020. The Convertible Senior Notes bear interest at the fixed 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 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.
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.
Beginning on 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.
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. Interest isfacility, at the time. The Senior Notes bear interest at the fixed rate of 3.250% per annum, 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 discussionActual results could be significantly different from these estimates.
Recently Issued Accounting Standards
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 2023, 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 DecemberMarch 31, 2016.2023. 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 2023.
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 remain in a hybrid work environment.
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 510 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 2023. 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 factorsJune 30, 2023 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) |
| 04/01/2023 to 04/30/2023 | | — | | | $ | — | | | — | | | $ | 75.0 | |
| 05/01/2023 to 05/31/2023 | | — | | | $ | — | | | — | | | $ | 75.0 | |
| 06/01/2023 to 06/30/2023 | | — | | | $ | — | | | — | | | $ | 75.0 | |
ITEM 5. OTHER INFORMATION
(c)
During the third quarterthree months ended June 30, 2023, no director or officer of 2017, we announcedthe Company adopted or terminated a restructuring plan designed to more closely align our financial resources against the critical priorities"Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement", as each term is defined in Item 408(a) of our business. This plan included a reduction in our global workforce, as well as other initiatives to improve operational efficiencies. Restructuring plans present significant potential risks that may impair our ability to achieve anticipated operating improvements and/or cost reductions. These risks include, among others, higher than anticipated costs in implementing our restructuring plans, management distraction from ongoing business activities, damage to our reputation and brand image and workforce attrition beyond planned reductions. If we are unable to successfully implement and manage our restructuring plans, we may not achieve our targeted operational improvements and efficiencies, including planned cost reductions. This could adversely impact our operating results and financial condition, and our future resultsRegulation S-K.
ITEM 6. EXHIBITS
|
| | | | | | | |
Exhibit No. | |
| |
| | Executive Employee Confidentiality, Non-Competition and Non-Solicitation Agreement, dated June 26, 2023, by and between Colin Browne and the Company.* |
| | 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: NovemberAugust 8, 20172023
