UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009March 31, 2010
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-33202
UNDER ARMOUR, INC.
(Exact name of registrant as specified in its charter)
Maryland | 52-1990078 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1020 Hull Street Baltimore, Maryland 21230 | (410) 454-6428 | ||
(Address of principal executive offices) (Zip Code) | (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer ¨ | |
Non-accelerated filer ¨ | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Class A Common Stock, $.0003 1/3 par value, 37,667,95438,193,958 shares outstanding as of October 31, 2009April 30, 2010 and Class B Convertible Common Stock, $.0003 1/3 par value, 12,500,000 shares outstanding as of October 31, 2009.April 30, 2010.
September 30, 2009March 31, 2010
PART I. | ||||
Item 1. | ||||
1 | ||||
2 | ||||
3 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 3. | ||||
Item 4. | ||||
PART II. | ||||
Item 1A. | ||||
Item 2. | ||||
Item 6. | ||||
Under Armour, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
(In thousands, except share data)
September 30, 2009 | December 31, 2008 | |||||||||||||||||||
(unaudited) | March 31, 2010 | December 31, 2009 | March 31, 2009 | |||||||||||||||||
Assets | ||||||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 93,376 | $ | 102,042 | $ | 165,962 | $ | 187,297 | $ | 65,572 | ||||||||||
Accounts receivable, net | 145,043 | 81,302 | 110,332 | 79,356 | 105,999 | |||||||||||||||
Inventories | 152,753 | 182,232 | ||||||||||||||||||
Inventories, net | 147,865 | 148,488 | 164,426 | |||||||||||||||||
Prepaid expenses and other current assets | 16,041 | 18,023 | 11,697 | 19,989 | 14,359 | |||||||||||||||
Deferred income taxes | 12,178 | 12,824 | 11,376 | 12,870 | 13,850 | |||||||||||||||
Total current assets | 419,391 | 396,423 | 447,232 | 448,000 | 364,206 | |||||||||||||||
Property and equipment, net | 73,557 | 73,548 | 74,539 | 72,926 | 76,085 | |||||||||||||||
Intangible assets, net | 6,203 | 5,470 | 5,168 | 5,681 | 5,064 | |||||||||||||||
Deferred income taxes | 12,078 | 8,687 | 16,950 | 13,908 | 8,825 | |||||||||||||||
Other long term assets | 4,839 | 3,427 | 5,362 | 5,073 | 4,136 | |||||||||||||||
Total assets | $ | 516,068 | $ | 487,555 | $ | 549,251 | $ | 545,588 | $ | 458,316 | ||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Revolving credit facility | $ | — | $ | 25,000 | ||||||||||||||||
Accounts payable | 59,257 | 72,435 | $ | 68,586 | $ | 68,710 | $ | 61,901 | ||||||||||||
Accrued expenses | 41,949 | 25,905 | 30,817 | 40,885 | 25,353 | |||||||||||||||
Current maturities of long term debt | 8,135 | 7,072 | 8,944 | 9,178 | 7,012 | |||||||||||||||
Current maturities of capital lease obligations | 157 | 361 | 50 | 97 | 299 | |||||||||||||||
Other current liabilities | 5,852 | 2,337 | 3,221 | 1,292 | 2,767 | |||||||||||||||
Total current liabilities | 115,350 | 133,110 | 111,618 | 120,162 | 97,332 | |||||||||||||||
Long term debt, net of current maturities | 9,985 | 13,061 | 8,921 | 10,948 | 11,292 | |||||||||||||||
Capital lease obligations, net of current maturities | — | 97 | ||||||||||||||||||
Capital lease obligation, net of current maturities | - | - | 50 | |||||||||||||||||
Other long term liabilities | 13,219 | 10,190 | 15,865 | 14,481 | 10,884 | |||||||||||||||
Total liabilities | 138,554 | 156,458 | 136,404 | 145,591 | 119,558 | |||||||||||||||
Commitments and contingencies (see Note 5) | ||||||||||||||||||||
Stockholders’ equity | ||||||||||||||||||||
Class A Common Stock, $.0003 1/3 par value; 100,000,000 shares authorized as of September 30, 2009 and December 31, 2008; 37,645,473 shares issued and outstanding as of September 30, 2009, 36,808,750 shares issued and outstanding as of December 31, 2008 | 13 | 12 | ||||||||||||||||||
Class B Convertible Common Stock, $.0003 1/3 par value; 12,500,000 shares authorized, issued and outstanding as of September 30, 2009 and December 31, 2008 | 4 | 4 | ||||||||||||||||||
Class A Common Stock, $.0003 1/3 par value; 100,000,000 shares authorized as of March 31, 2010, December 31, 2009 and March 31, 2009; 38,145,423 shares issued and outstanding as of March 31, 2010, 37,747,647 shares issued and outstanding as of December 31, 2009, 37,045,010 shares issued and outstanding as of March 31, 2009 | 13 | 13 | 12 | |||||||||||||||||
Class B Convertible Common Stock, $.0003 1/3 par value; 12,500,000 shares authorized, issued and outstanding as of March 31, 2010, December 31, 2009 and March 31, 2009 | 4 | 4 | 4 | |||||||||||||||||
Additional paid-in capital | 190,576 | 174,725 | 201,963 | 197,342 | 178,128 | |||||||||||||||
Retained earnings | 186,986 | 156,011 | 209,278 | 202,188 | 159,973 | |||||||||||||||
Unearned compensation | (20 | ) | (60 | ) | (8 | ) | (14 | ) | (42 | ) | ||||||||||
Accumulated other comprehensive income | (45 | ) | 405 | 1,597 | 464 | 683 | ||||||||||||||
Total stockholders’ equity | 377,514 | 331,097 | 412,847 | 399,997 | 338,758 | |||||||||||||||
Total liabilities and stockholders’ equity | $ | 516,068 | $ | 487,555 | $ | 549,251 | $ | 545,588 | $ | 458,316 | ||||||||||
See accompanying notes.
1
Under Armour, Inc. and Subsidiaries
Unaudited Consolidated Statements of Income
(In thousands, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | Three Months Ended March 31, | ||||||||||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | 2010 | 2009 | |||||||||||||||||||
Net revenues | $ | 269,546 | $ | 231,946 | $ | 634,194 | $ | 545,965 | $ | 229,407 | $ | 200,000 | ||||||||||||
Cost of goods sold | 135,491 | 113,679 | 335,310 | 281,959 | 121,776 | 110,776 | ||||||||||||||||||
Gross profit | 134,055 | 118,267 | 298,884 | 264,006 | 107,631 | 89,224 | ||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling, general and administrative expenses | 86,992 | 71,788 | 240,544 | 209,954 | 94,047 | 81,328 | ||||||||||||||||||
Income from operations | 47,063 | 46,479 | 58,340 | 54,052 | 13,584 | 7,896 | ||||||||||||||||||
Interest expense, net | (466 | ) | (111 | ) | (1,909 | ) | (498 | ) | (546 | ) | (860 | ) | ||||||||||||
Other income (expense), net | 96 | (1,625 | ) | (253 | ) | (1,514 | ) | (685 | ) | 13 | ||||||||||||||
Income before income taxes | 46,693 | 44,743 | 56,178 | 52,040 | 12,353 | 7,049 | ||||||||||||||||||
Provision for income taxes | 20,511 | 19,080 | 24,595 | 22,132 | 5,183 | 3,087 | ||||||||||||||||||
Net income | $ | 26,182 | $ | 25,663 | $ | 31,583 | $ | 29,908 | $ | 7,170 | $ | 3,962 | ||||||||||||
Net income available per common share | ||||||||||||||||||||||||
Basic | $ | 0.52 | $ | 0.52 | $ | 0.64 | $ | 0.61 | $ | 0.14 | $ | 0.08 | ||||||||||||
Diluted | $ | 0.52 | $ | 0.51 | $ | 0.62 | $ | 0.59 | $ | 0.14 | $ | 0.08 | ||||||||||||
Weighted average common shares outstanding | ||||||||||||||||||||||||
Basic | 50,046 | 49,217 | 49,731 | 49,016 | 50,419 | 49,420 | ||||||||||||||||||
Diluted | 50,749 | 50,435 | 50,585 | 50,321 | 50,913 | 50,430 |
See accompanying notes.
2
Under Armour, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
(In thousands; unaudited)
Class A | Class B Convertible | Additional | Unearned | Accum- ulated Other Compre- hensive | Compre- | Total | ||||||||||||||||||||||||||||
Common Stock | Common Stock | Paid-In | Retained | Compen- | Income | hensive | Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Earnings | sation | (Loss) | Income | Equity | |||||||||||||||||||||||||
Balance as of December 31, 2008 | 36,809 | $ | 12 | 12,500 | $ | 4 | $ | 174,725 | $ | 156,011 | $ | (60 | ) | $ | 405 | $ | 331,097 | |||||||||||||||||
Exercise of stock options | 782 | 1 | — | — | 3,480 | — | — | — | 3,481 | |||||||||||||||||||||||||
Shares withheld in consideration of employee tax obligations relative to stock-based compensation arrangements | (26 | ) | — | — | — | — | (608 | ) | — | — | (608 | ) | ||||||||||||||||||||||
Issuance of Class A Common Stock, net of forfeitures | 80 | — | — | — | 1,231 | — | — | — | 1,231 | |||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | 7,720 | — | 40 | — | 7,760 | |||||||||||||||||||||||||
Net excess tax benefits from stock-based compensation arrangements | — | — | — | — | 3,420 | — | — | — | 3,420 | |||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 31,583 | — | — | $ | 31,583 | ||||||||||||||||||||||||
Foreign currency translation adjustment, net of tax of $122 | — | — | — | — | — | — | — | (450 | ) | (450 | ) | |||||||||||||||||||||||
Comprehensive income | $ | 31,133 | 31,133 | |||||||||||||||||||||||||||||||
Balance as of September 30, 2009 | 37,645 | $ | 13 | 12,500 | $ | 4 | $ | 190,576 | $ | 186,986 | $ | (20 | ) | $ | (45 | ) | $ | 377,514 | ||||||||||||||||
Balance as of December 31, 2007 | 36,190 | $ | 12 | 12,500 | $ | 4 | $ | 162,362 | $ | 117,782 | $ | (182 | ) | $ | 507 | $ | 280,485 | |||||||||||||||||
Exercise of stock options | 210 | — | — | — | 648 | — | — | — | 648 | |||||||||||||||||||||||||
Issuance of Class A Common Stock, net of forfeitures | 385 | — | — | — | 909 | — | — | — | 909 | |||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | 5,778 | — | 100 | — | 5,878 | |||||||||||||||||||||||||
Net excess tax benefits from stock-based compensation arrangements | — | — | — | — | 1,882 | — | — | — | 1,882 | |||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 29,908 | — | — | $ | 29,908 | ||||||||||||||||||||||||
Foreign currency translation adjustment, net of tax of $5 | — | — | — | — | — | — | — | 65 | 65 | |||||||||||||||||||||||||
Comprehensive income | $ | 29,973 | 29,973 | |||||||||||||||||||||||||||||||
Balance as of September 30, 2008 | 36,785 | $ | 12 | 12,500 | $ | 4 | $ | 171,579 | $ | 147,690 | $ | (82 | ) | $ | 572 | $ | 319,775 | |||||||||||||||||
See accompanying notes.
3
Under Armour, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended September 30, | ||||||||||||||||
2009 | 2008 | Three Months Ended March 31, | ||||||||||||||
(unaudited) | (unaudited) | 2010 | 2009 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income | $ | 31,583 | $ | 29,908 | $ | 7,170 | $ | 3,962 | ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities | ||||||||||||||||
Depreciation and amortization | 20,795 | 15,483 | 7,597 | 6,832 | ||||||||||||
Unrealized foreign currency exchange rate (gains) losses | (6,135 | ) | 1,517 | |||||||||||||
Unrealized foreign currency exchange rate losses | 3,490 | 1,045 | ||||||||||||||
Stock-based compensation | 7,760 | 5,878 | 3,336 | 2,657 | ||||||||||||
Loss on disposal of property and equipment | 37 | 29 | 20 | 196 | ||||||||||||
Deferred income taxes | (2,441 | ) | (1,166 | ) | (1,703 | ) | (1,619 | ) | ||||||||
Changes in reserves for doubtful accounts, returns, discounts and inventories | (1,213 | ) | 2,704 | (3,532 | ) | (1,532 | ) | |||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (57,728 | ) | (60,777 | ) | (34,566 | ) | (23,320 | ) | ||||||||
Inventories | 28,433 | 1,430 | 1,700 | 16,718 | ||||||||||||
Prepaid expenses and other assets | 371 | (8,705 | ) | 4,049 | 3,900 | |||||||||||
Accounts payable | (13,885 | ) | 8,623 | (86 | ) | (10,340 | ) | |||||||||
Accrued expenses and other liabilities | 15,093 | 772 | (4,948 | ) | (253 | ) | ||||||||||
Income taxes payable and receivable | 2,987 | 10,857 | 5,697 | (39 | ) | |||||||||||
Net cash provided by operating activities | 25,657 | 6,553 | ||||||||||||||
Net cash used in operating activities | (11,776 | ) | (1,793 | ) | ||||||||||||
Cash flows from investing activities | ||||||||||||||||
Purchase of property and equipment | (16,049 | ) | (30,848 | ) | (7,154 | ) | (8,063 | ) | ||||||||
Purchase of trust owned life insurance policies | (35 | ) | (2,868 | ) | ||||||||||||
Proceeds from sales of property and equipment | — | 7 | ||||||||||||||
Purchase of trust-owned life insurance policies | (325 | ) | - | |||||||||||||
Net cash used in investing activities | (16,084 | ) | (33,709 | ) | (7,479 | ) | (8,063 | ) | ||||||||
Cash flows from financing activities | ||||||||||||||||
Proceeds from revolving credit facility | — | 30,000 | ||||||||||||||
Payments on revolving credit facility | (25,000 | ) | �� | (15,000 | ) | - | (25,000 | ) | ||||||||
Proceeds from long term debt | 3,567 | 13,214 | ||||||||||||||
Payments on long term debt | (5,580 | ) | (4,626 | ) | (2,261 | ) | (1,829 | ) | ||||||||
Payments on capital lease obligations | (301 | ) | (355 | ) | (47 | ) | (109 | ) | ||||||||
Excess tax benefits from stock-based compensation arrangements | 4,266 | 1,891 | 716 | 201 | ||||||||||||
Payments of deferred financing costs | (1,354 | ) | — | - | (1,354 | ) | ||||||||||
Proceeds from exercise of stock options and other stock issuances | 4,331 | 1,557 | 889 | 692 | ||||||||||||
Net cash provided by (used in) financing activities | (20,071 | ) | 26,681 | |||||||||||||
Net cash used in financing activities | (703 | ) | (27,399 | ) | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 1,832 | 39 | (1,377 | ) | 785 | |||||||||||
Net decrease in cash and cash equivalents | (8,666 | ) | (436 | ) | (21,335 | ) | (36,470 | ) | ||||||||
Cash and cash equivalents | ||||||||||||||||
Beginning of period | 102,042 | 40,588 | 187,297 | 102,042 | ||||||||||||
End of period | $ | 93,376 | $ | 40,152 | $ | 165,962 | $ | 65,572 | ||||||||
Non-cash investing and financing activities | ||||||||||||||||
Fair market value of shares witheld in consideration of employee tax obligations relative to stock-based compensation | $ | 608 | $ | — | ||||||||||||
Purchase of property and equipment through certain obligations | 2,358 | 1,769 | $ | 1,537 | $ | 570 | ||||||||||
Purchase of intangible asset through certain obligations | 2,105 | — |
See accompanying notes.
4
Under Armour, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
1. Description of the Business
Under Armour, Inc. is a developer, marketer and distributor of branded performance apparel, footwear and accessories. These products are sold worldwide and worn by athletes at all levels, from youth to professional on playing fields around the globe, as well as by consumers with active lifestyles.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Under Armour, Inc. and its wholly owned subsidiaries (the “Company”). All inter-company balances and transactions have been eliminated. The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.
Interim Financial Data
The results for the three and nine months ended September 30, 2009March 31, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 20092010 or any other portions thereof. Certain information in footnote disclosures normally included in annual financial statements has been condensed or omitted for the interim periods presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim consolidated financial statements.
These financial statements do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair presentation of the financial position and results of operations have been included.
The consolidated balance sheet as of December 31, 20082009 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 20082009 (the “2008“2009 Form 10-K”), which should be read in conjunction with these consolidated financial statements.
Concentration of Credit Risk
Financial instruments that subject the Company to a significant concentration of credit risk consist primarily of accounts receivable. The majority of the Company’s accounts receivable isare due from large sporting goods retailers. Credit is extended based on an evaluation of the customer’s financial condition and generally collateral is not required. The most significant customers that accounted for a large portion of net revenues and accounts receivable arewere as follows:
Customer A | Customer B | Customer C | |||||||
Net revenues | |||||||||
Nine months ended September 30, 2009 | 20.5 | % | 10.3 | % | 4.9 | % | |||
Nine months ended September 30, 2008 | 20.0 | % | 13.8 | % | 4.3 | % | |||
Accounts receivable | |||||||||
As of September 30, 2009 | 21.7 | % | 10.7 | % | 4.7 | % | |||
As of September 30, 2008 | 26.5 | % | 14.1 | % | 4.1 | % |
Customer A | Customer B | Customer C | |||||||
Net revenues | |||||||||
Three months ended March 31, 2010 | 20.4 | % | 9.4 | % | 5.9 | % | |||
Three months ended March 31, 2009 | 20.8 | % | 10.5 | % | 5.4 | % | |||
Accounts receivable | |||||||||
As of March 31, 2010 | 22.1 | % | 11.9 | % | 6.4 | % | |||
As of March 31, 2009 | 25.4 | % | 13.5 | % | 7.3 | % |
Allowance for Doubtful Accounts Receivable
Accounts receivable are recorded at the invoice price net of an allowance for doubtful accounts and reserves for returns and certain sales allowances, and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in accounts receivable. As of September 30,March 31, 2010, December 31, 2009 and DecemberMarch 31, 2008,2009, the allowance for doubtful accounts was $5.5$5.0 million, $5.2 million and $4.2$4.7 million, respectively. In determining
Sales Returns, Allowances, Markdowns and Discounts
The Company records reductions to revenue for estimated customer returns, allowances, markdowns and discounts. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns and markdowns. The actual amount of customer returns and allowances, which is inherently uncertain,
may differ from the allowance for doubtful accounts,Company’s estimates. If the Company considers its historical level of credit losses and significant economic developmentsdetermined that could impactactual or expected returns or allowances were significantly greater or lower than the ability of its customersreserves it had established, it would record a reduction or increase, as appropriate, to pay outstanding balances and makes judgments aboutnet sales in the creditworthiness of significant customersperiod in which the Company made such a determination. Provisions for customer specific discounts based on ongoing credit evaluations. Receivable balancescontractual obligations with certain major customers are written off against the allowance when management believes it is probable the receivable will not be recovered.recorded as reductions to net sales.
5
Reserves for returns allowances, certain markdowns and certain discountsallowances are recorded as an offsetoffsets to accounts receivable as settlements are made through offsets to outstanding customer invoices. The majorityBeginning in the first quarter of 2010, reserves for markdowns and discounts earned by customers in the period arewere recorded as liabilities withinoffsets to accounts receivable as settlements were made through offsets to outstanding customer invoices. Historically, the majority of these amounts were recorded as accrued expenses as they stipulate settlements to bewere made through Company cash disbursements. In addition, certainAs of March 31, 2010, there were $6.9 million in customer markdowns expected to be paid to customers through cash disbursements areand discounts recorded as liabilities withinoffsets to accounts receivable, and no amounts were recorded as accrued expenses. The Company does not have any off-balance-sheet credit exposure relatedAs of December 31, 2009 and March 31, 2009, there were no significant customer markdowns or discounts recorded as offsets to its customers.accounts receivable, and $6.9 million and $4.8 million were recorded as accrued expenses, respectively.
Income Taxes
The Company recorded $20.5$5.2 million and $19.1$3.1 million of income tax expense for the three months ended September 30,March 31, 2010 and 2009, and 2008, respectively, and $24.6 million and $22.1 million of income tax expense for the nine months ended September 30, 2009 and 2008, respectively. The effective rates for income taxes were 43.8%42.0% and 42.5%43.8% for the ninethree months ended September 30,March 31, 2010 and 2009, and 2008, respectively. The effective tax rate for the ninethree months ended September 30, 2009March 31, 2010 was higherlower than the comparable period in 2008effective tax rate for the three months ended March 31, 2009 primarily due to an increasedecreased losses in projected non-deductible expensesforeign subsidiaries and certain tax strategies implemented by the Company in the current year.2010. The Company’s annual 20092010 effective tax rate is expected to be approximately 44.3%, which is lower thanimproved from the 20082009 annual effective tax rate of 45.3%43.2% due to certain sourcing and tax strategies implemented by the Company in 2009.
Accrued Expenses
At September 30, 2009, accrued expenses primarily included $14.8 million, $7.3 million and $6.4 million, of accrued compensation and benefits, marketing expenses, and certain customer markdowns and discounts, respectively. At December 31, 2008, accrued expenses primarily included $6.8 million, $6.0 million and $5.1 million of accrued marketing expense, compensation and benefits, and customer discounts, respectively.drivers for the quarter noted above.
Shipping and Handling Costs
The Company charges certain customers shipping and handling fees. These fees are recorded in net revenues. Outbound freight costs associated with shipping goods to customers are recorded as cost of goods sold. The Company includes the majority of outbound shipping and handling costs as a component of selling, general and administrative expenses. Outbound shipping and handling costs include internal costs associated with shippingpreparing 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 $5.5$3.6 million and $5.0$2.4 million for the three months ended September 30,March 31, 2010 and 2009, and 2008, respectively, and $15.0 million and $12.5 million for the nine months ended September 30, 2009 and 2008, respectively.
Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Recently IssuedAdopted Accounting Standards
In June 2009, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). This amendment requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE. The amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE. Finally, an enterprise will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment is effective for financial statements issued for annual periods beginning after November 15, 2009, and for interim periods within the first annual period. The Company is currently evaluating the impactadoption of this amendment on its consolidated financial statements.
Recently Adopted Accounting Standards
In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”). The Codification has become the single source of authoritative generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification is non-authoritative. The adoption of the Codification did not have anyhad no impact on the Company’s consolidated financial statements.
Reclassifications
6
In MayOutbound shipping costs of $2.7 million included in selling, general and administrative expenses for the three months ended March 31, 2009 were reclassified to cost of goods sold to conform to the FASB issued accounting guidance that establishes accounting and reporting standardspresentation for events that occur after the balance sheet date but before financial statements are issued or are available to be issued.three months ended March 31, 2010. In addition, entities must disclosecosts of $1.4 million associated with the date through which subsequent eventsCompany’s sourcing offices and Special Make-Up Shop included in cost of goods sold for the three months ended March 31, 2009 have been evaluatedreclassified to selling, general and administrative expenses to conform to the basispresentation for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This guidance was effective for fiscal years and interim periods ending after June 15, 2009. The adoption of this guidance did not have any impact on the Company’s consolidated financial statements.three months ended March 31, 2010. The Company has performed an evaluationbelieves these changes reflect its view that cost of subsequent events through November 4, 2009,goods sold should primarily include product costs which isare variable in nature. In addition, these reclassifications will more closely align with the dayway the financial statements were issued.
In June 2008, the FASB issued accounting guidance requiring that unvested stock-based compensation awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) should be classified as participating securities and should be included in the computation of earnings per share pursuant to the two-class method. The provisions of this guidance were required for fiscal years beginning after December 15, 2008. The Company has adopted this guidance for current period computations of earnings per share, and has updated prior period computations of earnings per share. The adoption of this guidance in the first quarter of 2009 did not have a material impact on the Company’s computation of earnings per share. Refer to Note 9 for further discussion.
In June 2008, the FASB issued accounting guidance addressing the determination of whether provisions that introduce adjustment features (including contingent adjustment features) would prevent treating a derivative contract or an embedded derivative on a company’s own stock as indexed solely to the company’s stock. This guidance was effective for fiscal years beginning after December 15, 2008. The adoption of this guidance in the first quarter of 2009 did not have any impact on the Company’s consolidated financial statements.
In March 2008, the FASB issued accounting guidance intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. This guidance was effective for the fiscal years and interim periods beginning after November 15, 2008. The adoption of this guidance in the first quarter of 2009 did not have any impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued replacement guidance that requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired entity at fair value. This replacement guidance also requires transaction costs related to the business combination to be expensed as incurred. It was effective for business combinations for which the acquisition date is on or after the start of the fiscal year beginning after December 15, 2008. The adoption of this guidance in the first quarter of 2009 did not have any impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued accounting guidance that establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance was effective for fiscal years beginning after December 15, 2008. The adoption of this guidance in the first quarter of 2009 did not have any impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued accounting guidance which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. This guidance was effective for fiscal years beginning after November 15, 2007, however the FASB delayed the effective date to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more frequent basis. The adoption of this guidance for nonfinancial assets and liabilities in the first quarter of 2009 did not have any impact on the Company’s consolidated financial statements.
7manages its business.
3. Inventories, Net
Inventories consisted of the following:
(In thousands) | September 30, 2009 | December 31, 2008 | March 31, 2010 | December 31, 2009 | March 31, 2009 | |||||||||||||||
Finished goods | $ | 160,488 | $ | 187,072 | $ | 153,553 | $ | 155,596 | $ | 169,518 | ||||||||||
Raw materials | 796 | 731 | 620 | 785 | 706 | |||||||||||||||
Work-in-process | 40 | 6 | 55 | 71 | 65 | |||||||||||||||
Subtotal inventories | 161,324 | 187,809 | 154,228 | 156,452 | 170,289 | |||||||||||||||
Inventories reserve | (8,571 | ) | (5,577 | ) | (6,363 | ) | (7,964 | ) | (5,863 | ) | ||||||||||
Total inventories | $ | 152,753 | $ | 182,232 | ||||||||||||||||
Total inventories, net | $ | 147,865 | $ | 148,488 | $ | 164,426 | ||||||||||||||
4. Revolving Credit Facility and Long Term Debt
Revolving Credit Facility
In January 2009, theThe Company entered intohas a new revolving credit facility with certain lending institutions, and terminated its prior revolving credit facility in order to increase the Company’s available financing and to expand its lending syndicate. In conjunction with the termination of the prior revolving credit facility, the Company repaid the then outstanding balance of $25.0 million and did not borrow under the new revolving credit facility through October 31, 2009.
institutions. The revolving credit facility has a term of three years, expiring in January 2012, and provides for a committed revolving credit line of up to $200.0 million based on the Company’s qualified domestic inventory and accounts receivable balances. The commitment amount under the revolving credit facility may be increased by an additional $50.0 million, subject to certain conditions and approvals per the credit agreement. The Company incurred and capitalized $1.4 million in deferred financing costs in connection with the revolving credit facility. The borrowing capacity, defined as the product of the remaining term and the maximum available credit of a financing agreement, of the new revolving credit facility is greater than the prior facility. In addition, certain lenders included in the prior revolving credit facility are also included in the new revolving credit facility. Thus, unamortized deferred financing costs of $0.4 million relating to the Company’s prior revolving credit facility were expensed during the nine months ended September 30, 2009 and $0.1 million of deferred financing costs was added to the deferred financing costs of the new revolving credit facility and will be amortized over the life of the new revolving credit facility.
The revolving credit facility may be used for working capital and general corporate purposes. It is collateralized by substantially all of the assets of the Company and its domestic subsidiaries (other than the Company’s trademarks), and by a pledge of 65% of the equity interests of substantially all of the Company’s foreign subsidiaries. Up to $5.0 million of the revolving credit facility may be used to support letters of credit, of which $3.5 million was outstanding as of September 30, 2009.March 31, 2010. The Company must maintain a certain leverage ratio and fixed charge coverage ratio as defined in the credit agreement. As of September 30, 2009,March 31, 2010, the Company was in compliance with these financial covenants. The revolving credit facility also provides the lenders with the ability to reduce the borrowing base, even if the Company is in compliance with all conditions of the revolving credit facility, upon a material adverse change to the business, properties, assets, financial condition or results of operations of the Company. The revolving credit facility contains a number of restrictions that limit the Company’s ability, among other things, and subject to certain limited exceptions, to incur additional indebtedness, pledge its assets as security, guaranty obligations of third parties, make investments, undergo a merger or consolidation, dispose of assets, or materially change its line of business. In addition, the revolving credit facility includes a cross default provision whereby an event of default under other debt obligations, as defined in the credit agreement, will be considered an event of default under this credit agreement.
Borrowings under the revolving credit facility bear interest based on the daily balance outstanding at LIBOR (with LIBOR subject to a rate floor of 1.25%) plus an applicable margin (varying from 2.0% to 2.5%) or, in certain cases at the Company’s option, a base rate (based on the prime rate or as otherwise specified in the credit agreement, with the base rate subject to a rate floor of 2.25%) plus an applicable margin (varying from 1.0% to 1.5%). The revolving credit facility also carries a commitment fee varying from 0.38% to 0.5% of the committed line amount less outstanding borrowings and letters of credit. The applicable margins are calculated quarterly and vary based on the Company’s leverage ratio as defined in the credit agreement.
Prior to entering into the revolving credit facility in January 2009, the Company terminated its prior $100.0 million revolving credit facility. In conjunction with the termination of the prior revolving credit facility, the Company repaid the then outstanding balance of $25.0 million. The prior revolving credit facility was also collateralized by substantially all of the Company’s assets, other than its trademarks, and included covenants, conditions and other terms similar to the Company’s newcurrent revolving credit facility.
8
As of September 30, 2009,March 31, 2010, the Company’s net availability was $158.7$123.9 million based on its eligible domestic inventory and accounts receivable balances. The weighted average interest rate on the balances outstanding under the prior revolving credit facility was 3.5% for1.4% during the three months ended September 30, 2008, and 1.4% and 3.5%March 31, 2009. No balances were outstanding under the current revolving credit facility during the ninethree months ended September 30, 2009March 31, 2010 and 2008, respectively.2009.
Long Term Debt
In March 2005, theThe Company entered into an agreementhas long term debt agreements with various lenders to finance the acquisition or lease of up to $17.0 million in qualifying capital investments. Loans under this agreementthese agreements are collateralized by a first lien on the related assets acquired. The agreement isAs these agreements are not a committed facility, withfacilities, each advance under the agreementis subject to approval by the lender’s approval. In March 2008, the lender agreed to increase the maximum financing under the agreement to $37.0 million.
In May 2008, the Company entered into an additional agreement to finance the acquisition or lease of up to $40.0 million in qualifying capital investments. Loans under this additional agreement are collateralized by a first lien on the assets acquired. This additional agreement is not a committed facility, with each advance under the agreement subject to the lender’s approval.
Theselenders. Additionally, these agreements include a cross default provision whereby an event of default under other debt obligations, including the Company’s revolving credit facility, agreement, iswill be considered an event of default under these agreements. In addition, theseThese agreements require a prepayment fee if the Company pays outstanding amounts ahead of the scheduled term. Through September 30, 2009, the Company has financed $36.6 million of property and equipment under these agreements.terms. The terms of the Company’s revolving credit facility limit the total amount of additional financing available under these agreements to $35.0 million, of which $31.4$27.4 million was available as of September 30, 2009.
As of September 30,March 31, 2010. At March 31, 2010, December 31, 2009 and DecemberMarch 31, 2008,2009, the outstanding principal balances were $18.1balance under these agreements was $17.9 million, $20.1 million and $20.1$18.3 million, respectively, under these agreements. Advancesrespectively. Currently, advances under these agreements bear interest rates which are fixed at the time of each advance. The weighted average interest ratesrate on outstanding borrowings was 6.0% and 5.9% for each of the three months ended September 30, 2009March 31, 2010 and 2008, respectively, and 6.0% and 6.1% for the nine months ended September 30, 2009 and 2008, respectively.2009.
The Company monitors the financial health and stability of its lenders under the revolving credit and long term debt facilities; however, current significant instability in the credit markets could negatively impact lenders and their ability to perform under their facilities.
Interest expense was $0.5$0.6 million and $0.2$0.9 million for the three months ended September 30,March 31, 2010 and 2009, and 2008, respectively, and $2.0 million and $0.9 million for the nine months ended September 30, 2009 and 2008, respectively. Interest expense includes the amortization of deferred financing costs and interest expense under the revolving credit facility and long term debt.debt facilities.
5. Commitments and Contingencies
The Company is, from time to time, involved in routine legal matters incidental to its business. Management believes that the ultimate resolution of any such current proceedings and claims will notThere have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
In connection with various contracts and agreements, the Company has agreed to indemnify counterparties against certain third party claims relatingbeen no significant changes to the infringement of intellectual property rights and other items. Based oncontractual obligations reported in 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.
Certain key executives are party to agreements with the Company that include severance benefits upon involuntary termination of employment without cause or for good reason, including following a change in control of the Company.2009 Form 10-K.
6. Fair Value Measurements
On January 1, 2008, the Company adopted fair value accounting guidance for its financial assets and liabilities. On January 1, 2009, the Company adopted fair value accounting guidance for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The adoption in 2009 had no impact on the Company’s consolidated financial statements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). ThisThe fair value accounting guidance outlines a valuation framework and 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;
9
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 as of September 30, 2009March 31, 2010 are set forth in the table below:
(In thousands) | Level 1 | Level 2 | Level 3 | |||||||
Derivative foreign currency forward contracts (see Note 8) | $ | — | $ | (479 | ) | $ | — | |||
Rabbi Trust owned life insurance policies (“TOLI”) | — | 2,690 | — | |||||||
Deferred Compensation Plan (the “Plan”) | — | (2,592 | ) | — |
(In thousands) | Level 1 | Level 2 | Level 3 | |||||||
Derivative foreign currency forward contracts (see Note 8) | $ | - | $ | (371 | ) | $ | - | |||
Trust owned life insurance policies (“TOLI”) held by the Rabbi Trust | - | 3,192 | - | |||||||
Deferred Compensation Plan obligations | - | (3,084 | ) | - |
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 forward contracts represent gains and losses on derivative contracts, which are the net difference between the U.S. dollars to be received or paid at each contract’s settlement date and the U.S. dollar value of the foreign currency to be sold or purchased at the current forward exchange rate. The fair value of the TOLI held by the Rabbi Trust is based on the cash-surrender value of the life insurance policies, which are invested primarily in mutual funds and a separately managed fixed income fund. These investments are in the same funds and purchased in substantially the same amounts as the participants’ selected investments of participants, which represent the underlying liabilities to participants in the Deferred Compensation Plan. LiabilitiesObligations under the Deferred Compensation Plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments.
7. Stock-Based Compensation
The Under Armour, Inc. 2005 Omnibus Long-Term Incentive Plan (the “2005 Plan”) provides for the issuanceIn March 2010, 72.5 thousand shares of stock options, restricted stock restricted stock units and other equity awards to officers, directors, key employees and other persons. In March 2009, the Company’s Board of Directors approved, subject to stockholder approval, an amended and restated 2005 Plan that includes an increase in the maximum number of shares available under the 2005 Plan from 2.7 million to 10.0 million. The amended and restated 2005 Plan was approved by stockholders in May 2009. As of September 30, 2009, 6.9 million shares were available for future grants of awards under the 2005 Plan.
In March 2009, 1.2 million performance-based131.5 thousand stock options were awarded to certain officers and key employees under the Company’sUnder Armour, Inc. Amended and Restated 2005 Plan. TheseOmnibus Long-Term Incentive Plan
(“the 2005 Plan”). The restricted stock and stock options have a vesting term of four years. The stock options have a term of ten years from the grant date with vesting tied to the achievement of a combined annual operating income target for 2009 and 2010. Upon the achievement of the combined annual operating income target, 50% of the stock options (or 45% in certain cases) will vest and the remaining 50% of the stock options (or 45% in certain cases) will vest one year later. Thean exercise price of the performance-based stock options is $13.71,$28.41, which was the closing price of the Company’s Class A Common Stock on the date of grant. The weighted average fair value of each of the performance-based stock optionsoption was $7.33$15.76 and was estimated using the Black-ScholesBlack-Sholes option-pricing model consistent with the weighted average assumptions included inwithin the 20082009 Form 10-K.
In July 2008, the Company granted 185.8 thousandaddition, in March 2010, 1.1 million performance-based stock options were awarded to certain officers and key employees under the 2005 Plan to the Company’s President upon his hiring.Plan. The performance-based stock options have vesting of the award was subjectthat is tied to the achievement of four separate annual operating income targets. In March 2009, the operating income targets were reduced to more closely align the targets with the operating income targets for the performance-based stock options discussed above. These performance-based stock options will vest in four equal installments subject to the achievement ofa certain combined annual operating income targets beginning with 2010target for 2011 and 2011.2012. Upon the achievement of each of the combined annual operating income targets,target, 50% of the tranche (or 45% in certain cases)options will vest and the remaining 50% of the tranche (or 45% in certain cases) will vest one year later. The termIf certain lower levels of these performance-basedcombined operating income for 2011 and 2012 are achieved, fewer or no options will vest at that time, a portion one year later, and the remaining stock options is ten years from the July 2008 grant date and the exercise price is $28.93, which was the closing price of the Company’s Class A Stock on the grant date.will be forfeited. The weighted average fair value of each performance-based stock option was modified to $5.15$16.38 and was estimated using modification date valuation inputs similar to the Black-Sholes option-pricing model consistent with the weighted average assumptions included inwithin the 20082009 Form 10-K.
Through September 30, 2009, As of March 31, 2010, the Company didhad not record stock-basedrecorded stock based compensation expense for any of thethese performance-based stock options as the Company was unable to predict with certainty whether the combined operating income targets willwould be reached. The Company will assess the probability of the achievement of the operating income targets at the end of each reporting period. When it becomes probable that athe performance targettargets related to these performance-based stock options will be achieved, a cumulative adjustment will be recorded as if ratable stock-based compensation expense had been recorded since the grant date. A cumulative adjustment of $2.1$0.4 million would have been recorded at September 30, 2009March 31, 2010 had the achievement of the operating income targets been probable.
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8. Foreign Currency Risk Management and Derivatives
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates mainly relating to transactions generated by its international subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by inter-company transactions. InSince August 2007, the Company has entered into foreign currency forward contracts to reduce the risk associated with foreign currency exchange rate fluctuations on inter-company transactions and projected inventory purchases for its Canadian subsidiary. Beginning inSince December 2008, the Company began usinghas entered into foreign currency forward contracts in order to reduce the risk associated with foreign currency exchange rate fluctuations on inter-company transactions for its European subsidiary.
As of September 30, 2009,March 31, 2010, the notional value of the Company’s outstanding foreign currency forward contracts used to mitigate the foreign currency exchange rate fluctuations on its Canadian subsidiary’s inter-company transactions and projected inventory purchases was $20.7$15.4 million with contract maturities of 1 to 2 months.month. As of September 30, 2009,March 31, 2010, the notional value of the Company’s outstanding foreign currency forward contracts used to mitigate the foreign currency exchange rate fluctuations on its European’s subsidiary’s inter-company transactions was $45.0$58.6 million with contract maturities of 1 month. The foreign currency forward contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings. TheAs of March 31, 2010, the fair value of the Company’s foreign currency forward contracts was $0.5a liability of $0.4 million, as of September 30, 2009, and was included in accrued expenses on the consolidated balance sheet. TheAs of December 31, 2009 and March 31, 2009, the fair value of the Company’s foreign currency forward contracts was $1.2an asset of $0.3 million as of December 31, 2008,and $1.4 million, respectively, and was 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 income (expense), net were the following amounts related to changes in foreign currency exchange rates and derivative foreign currency forward contracts:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(In thousands) | 2009 | 2008 | 2009 | 2008 | 2010 | 2009 | ||||||||||||||||||
Unrealized foreign currency exchange rate gains (losses) | $ | 3,171 | $ | (1,697 | ) | $ | 6,135 | $ | (1,517 | ) | ||||||||||||||
Unrealized foreign currency exchange rate losses | $ | (3,490 | ) | $ | (1,045 | ) | ||||||||||||||||||
Realized foreign currency exchange rate gains (losses) | 460 | (490 | ) | (340 | ) | (882 | ) | 93 | (889 | ) | ||||||||||||||
Unrealized derivative gains (losses) | (661 | ) | 403 | (1,748 | ) | 750 | (637 | ) | 203 | |||||||||||||||
Realized derivative gains (losses) | (2,874 | ) | 140 | (4,300 | ) | 116 | ||||||||||||||||||
Realized derivative gains | 3,349 | 1,744 |
The Company enters into foreign currency forward 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 foreign currency forward contracts. The Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.
9. Earnings per Share
The Company adopted accounting guidance during the three months ended March 31, 2009 requiring any stock-based compensation awards that entitle their holders to receive dividends prior to vesting to be considered participating securities and to be included in the calculation offollowing represents a reconciliation from basic earnings per share using the two class method. Historically, these stock-based compensation awards were included in the calculation ofto diluted earnings per share using the treasury stock method. The Company determined that all outstanding restricted stock awards meet the definition of participating securities and should be included in basic earnings per share using the two class method. The Company included outstanding restricted stock awards in the calculation of basic earnings per share for the three and nine months ended September 30, 2009 and adjusted prior period earnings per share calculations. The application of this accounting guidance for the three months ended September 30, 2008 had no impact on the Company’s diluted earnings per share, but decreased diluted earnings per share presented for the nine months ended September 30, 2008 by $0.01. In addition, the application of this accounting guidance decreased basic earnings per share presented for each of the three and nine months ended September 30, 2008 by $0.01. The calculation of earnings per share for common stock shown below excludes the income attributable to outstanding restricted stock awards from the numerator and excludes the impact of these awards from the denominator.
11share:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(In thousands, except per share amounts) | 2009 | 2008 | 2009 | 2008 | 2010 | 2009 | ||||||||||||||||||
Numerator | ||||||||||||||||||||||||
Net income | $ | 26,182 | $ | 25,663 | $ | 31,583 | $ | 29,908 | $ | 7,170 | $ | 3,962 | ||||||||||||
Net income attributable to participating securities | (262 | ) | (308 | ) | (347 | ) | (299 | ) | (65 | ) | (48 | ) | ||||||||||||
Net income available to common shareholders (1) | $ | 25,920 | $ | 25,355 | $ | 31,236 | $ | 29,609 | $ | 7,105 | $ | 3,914 | ||||||||||||
Denominator | ||||||||||||||||||||||||
Weighted average common shares outstanding | 49,568 | 48,647 | 49,206 | 48,529 | 49,986 | 48,848 | ||||||||||||||||||
Effect of dilutive securities | 703 | 1,218 | 854 | 1,305 | 494 | 1,010 | ||||||||||||||||||
Weighted average common shares and | 50,271 | 49,865 | 50,060 | 49,834 | 50,480 | 49,858 | ||||||||||||||||||
Earnings per share - basic | $ | 0.52 | $ | 0.52 | $ | 0.63 | $ | 0.61 | $ | 0.14 | $ | 0.08 | ||||||||||||
Earnings per share - diluted | $ | 0.52 | $ | 0.51 | $ | 0.62 | $ | 0.59 | $ | 0.14 | $ | 0.08 | ||||||||||||
(1) Basic weighted average common shares outstanding | 49,568 | 48,647 | 49,206 | 48,529 | 49,986 | 48,848 | ||||||||||||||||||
Basic weighted average common shares | 50,046 | 49,217 | 49,731 | 49,016 | 50,419 | 49,420 | ||||||||||||||||||
Percentage allocated to common stockholders | 99.0 | % | 98.8 | % | 98.9 | % | 99.0 | % | 99.1 | % | 98.8 | % |
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options, restricted stock units, and warrants representing 1.11.3 million and 1.2 million shares of common stock outstanding for each of the three months ended September 30,March 31, 2010 and 2009, and 2008, respectively, and 1.2 million and 0.9 million shares of common stock outstanding for the nine months ended September 30, 2009 and 2008, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
10. Segment Data and Related Information
Operating segments are defined as components of an enterprise in which separate financial information is available and is evaluated regularly by the chief operating decision maker in assessing performance and in deciding how to allocate resources. The Company operates exclusively in the consumer products industry in which the Company develops, markets, and distributes branded performance apparel, footwear and accessories. Based on the nature of the financial information that is received by the chief operating decision maker, the Company operates within one operating and reportable segment in accordance with applicable guidance. Although the Company operates within one reportable segment, it hassells products from several product categories for which thecategories. The table below summarizes net revenues attributable to eachby product category are as follows:category:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
(In thousands) | 2009 | 2008 | 2009 | 2008 | ||||||||
Apparel | $ | 215,427 | $ | 201,085 | $ | 459,706 | $ | 426,480 | ||||
Footwear | 33,048 | 13,065 | 127,475 | 75,629 | ||||||||
Accessories | 10,760 | 8,896 | 23,548 | 22,264 | ||||||||
Total net sales | 259,235 | 223,046 | 610,729 | 524,373 | ||||||||
License revenues | 10,311 | 8,900 | 23,465 | 21,592 | ||||||||
Total net revenues | $ | 269,546 | $ | 231,946 | $ | 634,194 | $ | 545,965 | ||||
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Three Months Ended March 31, | ||||||
(In thousands) | 2010 | 2009 | ||||
Apparel | $ | 172,636 | $ | 132,239 | ||
Footwear | 42,958 | 56,931 | ||||
Accessories | 7,518 | 5,776 | ||||
Total net sales | 223,112 | 194,946 | ||||
License revenues | 6,295 | 5,054 | ||||
Total net revenues | $ | 229,407 | $ | 200,000 | ||
The table below summarizes product net revenues by geographic regions attributed by customer location:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||
(In thousands) | 2009 | 2008 | 2009 | 2008 | 2010 | 2009 | ||||||||||||
United States | $ | 242,184 | $ | 210,546 | $ | 576,120 | $ | 500,817 | $ | 204,089 | $ | 182,199 | ||||||
Canada | 14,043 | 12,677 | 30,605 | 26,836 | 11,669 | 10,343 | ||||||||||||
Subtotal | 256,227 | 223,223 | 606,725 | 527,653 | 215,758 | 192,542 | ||||||||||||
Other foreign countries | 13,319 | 8,723 | 27,469 | 18,312 | 13,649 | 7,458 | ||||||||||||
Total net revenues | $ | 269,546 | $ | 231,946 | $ | 634,194 | $ | 545,965 | $ | 229,407 | $ | 200,000 | ||||||
As of September 30, 2009During the three months ended March 31, 2010 and December 31, 2008,2009, substantially all of the Company’s long-lived assets were located in the United States.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Some of the statements contained in this Form 10-Q and the documents incorporated herein by reference (if any) constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Form 10-Q and the documents incorporated herein by reference (if any) 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 thethese forward-looking statements, including, but not limited to, those factors described in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) (our “2008“2009 Form 10-K”) or in this Form 10-Q under “Risk Factors”, if included herein, under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”). These factors include without limitation:
changes in general economic or market conditions that could affect consumer spending and the financial health of our retail customers;
our ability to forecast andeffectively manage our growth effectively;and a more complex business;
our ability to effectively develop and launch new, innovative and updated products;
our ability to accurately forecast consumer demand for our products and manage our inventory in response to changing demands;
our ability to obtain the financing required to grow our business, particularly when credit and capital markets are unstable;unstable or tighten;
increased competition causing us to reduce the prices of our products or to increase significantly our marketing efforts in order to avoid losing market share;
loss of key suppliers or manufacturers or failure of our suppliers or manufacturers to produce or deliver our products in a timely or cost-effective manner;
changes in consumer preferences or the reduction in demand for performance apparel, footwear and other products;
reduced demand for sporting goods and apparel generally;
our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;
our ability to effectively market and maintain a positive brand image;
the availability, integration and effective operation of management information systems and other technology; and
our ability to attract and retainmaintain the services of our senior management and key employees.
The forward-looking statements contained in this Form 10-Q reflect our views and assumptions only as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
Overview
We are a leading developer, marketer and distributor of branded performance apparel, footwear and accessories. The brand’s moisture-wicking synthetic fabrications are engineered in many different designs and styles for wear in nearly every
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climate to provide a performance alternative to traditional natural fiber products. Our products are sold worldwide and worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles.
Our
We are a growth company as evidenced by the increase in net revenues grew to $725.2$856.4 million in 20082009 from $205.2$281.1 million in 2004.2005. We reported net revenues of $634.2$229.4 million for the first ninethree months of 2009,2010, which represented a 16.2%14.7% increase from the first ninethree months of 2008.2009. We believe that our growth in net revenues has been driven by a growing interest in performance products and the strength of the Under Armour brand in the marketplace relative to our competitors, as evidenced by the increases in our sales of apparel and footwear.many of our products. We plan to continue to increase our net revenues over the long term by building uponincreased sales of our relationships with existing customers, expandingproducts, expansion of our product offerings, offering new and innovative products, expandingwholesale distribution, growth in our direct to consumer sales channel and other distribution and building our brand internationally.expansion of international markets. Our direct to consumer sales channel includes sales through our website and factory house outlet and specialty stores, website,stores. We are currently developing new products and catalog. New product offerings include thecategories, including basketball footwear, for introduction of performance running footwear, which we began shipping in the first quarter of 2009 and soccer cleats which had a limited introduction at soccer specialty stores in the United States and Europe during the second quarter of 2009. In addition, we have strategic agreements with third party licensees and distributors to further reinforce our brand identity and increase our net revenues.future.
Our products are currently offered in over 20,000approximately twenty thousand retail stores worldwide. A large majority of our products are sold in North America; however, we believe that our products appeal to athletes and consumers with active lifestyles around the globe. Internationally, our products are offered primarily in Austria, France, Germany, Ireland and the United Kingdom, France and Germany, as well as in Japan through a third-party licensee and through distributors located in other foreign countries.
General
Net revenues comprise both net sales and license revenues. Net sales includecomprise sales offrom our primary product categories, which are apparel, footwear and accessories. Our license revenues consist of fees paid to us by our licensees in exchange for the use of our trademarks on core products such as socks, hats,headwear, bags, eyewear, custom-molded mouth guards, other accessories and team uniforms, as well as the distribution of our products in Japan. We are currently developing our own headwear and bags, and beginning in 2011, these products will be sold by us rather than by one of our licensees.
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 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 footwear to be higher than the cost of goods sold associated with our apparel. In addition, cost of goods sold includes overhead costs associated with our Special Make-Up Shop located at one of our distribution facilities where we manufacture a limited number of products, and costs relating to our Hong Kong, Guangzhou, China, and Jakarta, Indonesia offices which help support manufacturing, quality assurance and sourcing efforts. No cost of goods sold is associated with license revenues.
We include aoutbound freight costs associated with shipping goods to customers as cost of goods sold; however, we include the majority of our outbound shipping and 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 shipping and handling costs in the calculation of their cost of goods sold. Outbound shipping and handling costs include costs associated with shippingpreparing goods to ship to customers and certain costs to operate our distribution facilities. These costs were $5.5$3.6 million and $5.0$2.4 million for the three months ended September 30,March 31, 2010 and 2009, and 2008, respectively, and $15.0 million and $12.5 million for the nine months ended September 30, 2009 and 2008, respectively.
Our selling, general and administrative expenses consist of costs related to marketing, selling, product innovation and supply chain and corporate services. Personnel costs are included in these categories based on the employees’ function. Personnel costs include salaries, benefits and incentive and stock-based compensation expense related to the employee. Our marketing costs are an important driver of our growth. For the full year 2009,2010, we expect to invest in marketing in the range of 12% to 13% of net revenues. Marketing costs consist primarily of commercials, print ads, league, team, player and event sponsorships, amortization of footwear promotional rights and depreciation expense specific to our in-store fixture programprogram. In addition, marketing costs include costs associated with our Special Make-Up Shop (“SMU Shop”) located at one of our distribution facilities where we manufacture a limited number of products primarily for our league, team, player and marketing related payroll.event sponsorships. Selling costs consist primarily of payroll and other costs relating to sales through our wholesale sales channel, and the majority of our direct to consumer sales channel costs, along with commissions paid to third parties. Product innovation and supply chain costs include our apparel, footwear and footwearaccessories product creation and development costs, distribution facility operating costs, and related payroll.costs relating to our Hong Kong and Guangzhou, China offices which help support manufacturing, quality assurance and sourcing efforts. Corporate services primarily consist of corporate facility operating costs related payroll and company-wide administrative and stock-based compensation expenses.
Other income (expense), net consists of unrealized and realized gains and losses on our 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.
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Reclassifications
Lastly, prior period stock-based compensation expense historically included in the corporate services selling, general and administrative expense category was reclassified among the appropriate selling, general and administrative expense categories based on the category in which the stock-based compensation award recipient was included to conform to the presentation for the three months ended March 31, 2010.
Results of Operations
The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(In thousands) | 2009 | 2008 | 2009 | 2008 | 2010 | 2009 | ||||||||||||||||||
Net revenues | $ | 269,546 | $ | 231,946 | $ | 634,194 | $ | 545,965 | $ | 229,407 | $ | 200,000 | ||||||||||||
Cost of goods sold | 135,491 | 113,679 | 335,310 | 281,959 | 121,776 | 110,776 | ||||||||||||||||||
Gross profit | 134,055 | 118,267 | 298,884 | 264,006 | 107,631 | 89,224 | ||||||||||||||||||
Selling, general and administrative expenses | 86,992 | 71,788 | 240,544 | 209,954 | 94,047 | 81,328 | ||||||||||||||||||
Income from operations | 47,063 | 46,479 | 58,340 | 54,052 | 13,584 | 7,896 | ||||||||||||||||||
Interest expense, net | (466 | ) | (111 | ) | (1,909 | ) | (498 | ) | (546 | ) | (860 | ) | ||||||||||||
Other income (expense), net | 96 | (1,625 | ) | (253 | ) | (1,514 | ) | (685 | ) | 13 | ||||||||||||||
Income before income taxes | 46,693 | 44,743 | 56,178 | 52,040 | 12,353 | 7,049 | ||||||||||||||||||
Provision for income taxes | 20,511 | 19,080 | 24,595 | 22,132 | 5,183 | 3,087 | ||||||||||||||||||
Net income | $ | 26,182 | $ | 25,663 | $ | 31,583 | $ | 29,908 | $ | 7,170 | $ | 3,962 | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(As a percentage of net revenues) | 2009 | 2008 | 2009 | 2008 | 2010 | 2009 | ||||||||||||||||||
Net revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of goods sold | 50.3 | 49.0 | 52.9 | 51.6 | 53.1 | 55.4 | ||||||||||||||||||
Gross profit | 49.7 | 51.0 | 47.1 | 48.4 | 46.9 | 44.6 | ||||||||||||||||||
Selling, general and administrative expenses | 32.2 | 31.0 | 37.9 | 38.5 | 41.0 | 40.6 | ||||||||||||||||||
Income from operations | 17.5 | 20.0 | 9.2 | 9.9 | 5.9 | 4.0 | ||||||||||||||||||
Interest expense, net | (0.2 | ) | (0.0 | ) | (0.3 | ) | (0.1 | ) | (0.2 | ) | (0.5 | ) | ||||||||||||
Other income (expense), net | 0.0 | (0.7 | ) | (0.0 | ) | (0.3 | ) | (0.3 | ) | 0.0 | ||||||||||||||
Income before income taxes | 17.3 | 19.3 | 8.9 | 9.5 | 5.4 | 3.5 | ||||||||||||||||||
Provision for income taxes | 7.6 | 8.2 | 3.9 | 4.0 | 2.3 | 1.5 | ||||||||||||||||||
Net income | 9.7 | % | 11.1 | % | 5.0 | % | 5.5 | % | 3.1 | % | 2.0 | % | ||||||||||||
Three Months Ended September 30, 2009March 31, 2010 Compared to Three Months Ended September 30, 2008March 31, 2009
Net revenues increased $37.6$29.4 million, or 16.2%14.7%, to $269.5$229.4 million for the three months ended September 30, 2009March 31, 2010 from $231.9$200.0 million for the same period in 2008.2009. This increase was primarily the result of an increase in our footwear and apparel net sales as noted in the product category table below:
Three Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||
(In thousands) | 2009 | 2008 | $ Change | % Change | 2010 | 2009 | $ Change | % Change | |||||||||||||||||
Apparel | $ | 215,427 | $ | 201,085 | $ | 14,342 | 7.1 | % | $ | 172,636 | $ | 132,239 | $ | 40,397 | 30.5 | % | |||||||||
Footwear | 33,048 | 13,065 | 19,983 | 153.0 | 42,958 | 56,931 | (13,973 | ) | (24.5 | ) | |||||||||||||||
Accessories | 10,760 | 8,896 | 1,864 | 21.0 | 7,518 | 5,776 | 1,742 | 30.2 | |||||||||||||||||
Total net sales | 259,235 | 223,046 | 36,189 | 16.2 | 223,112 | 194,946 | 28,166 | 14.4 | |||||||||||||||||
License revenues | 10,311 | 8,900 | 1,411 | 15.9 | 6,295 | 5,054 | 1,241 | 24.6 | |||||||||||||||||
Total net revenues | $ | 269,546 | $ | 231,946 | $ | 37,600 | 16.2 | % | $ | 229,407 | $ | 200,000 | $ | 29,407 | 14.7 | % | |||||||||
Net sales increased $36.2$28.2 million, or 16.2%14.4%, to $259.2$223.1 million for the three months ended September 30, 2009March 31, 2010 from $223.0$194.9 million during the same period in 20082009 as noted in the table above. The increase in net sales primarily reflects:
unit growth driven by increased distribution and new offerings in multiple product categories, most significantly in our women’s fitness, women’s underwear and overall running categories; along with
$20.017.6 million, or 72.8%, increase in footwear sales due primarily to running footwear.
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License revenues increased $1.4 million, or 15.9%, to $10.3 million for the three months ended September 30, 2009 from $8.9 million during the same period in 2008. This increase was the result of additional sales by certain licensees due to increased distribution, new product offerings and unit volume growth, as well as new licensing agreements for team uniforms and custom-molded mouth guards.
Gross profit increased $15.8 million to $134.1 million for the three months ended September 30, 2009 from $118.3 million for the same period in 2008. Gross profit as a percentage of net revenues, or gross margin, decreased 130 basis points to 49.7% for the three months ended September 30, 2009 compared to 51.0% during the same period in 2008. The decrease in gross margin percentage was primarily driven by the following:
increased footwear and apparel liquidations to third parties, accounting for an approximate 100 basis point decrease;
increased accessory and footwear inventory reserves, accounting for an approximate 100 basis point decrease; and
less favorable apparel product mix relative to margins, partially offset by improved apparel costing, accounting for an approximate 30 basis point decrease; partially offset by
decreased reserves for sales allowances and certain customer incentives, partially offset by increased sales returns reserves, accounting for an approximate 60 basis point increase; and
increased direct to consumer higher margin sales, accounting for an approximate 40 basis point increase.
Selling, general and administrative expenses increased $15.2 million to $87.0 million for the three months ended September 30, 2009 from $71.8 million for the same period in 2008. As a percentage of net revenues, selling, general and administrative expenses increased to 32.2% for the three months ended September 30, 2009 from 31.0% for the same period in 2008. These changes were primarily attributable to the following:
Marketing costs increased $2.9 million to $27.7 million for the three months ended September 30, 2009 from $24.8 million for the same period in 2008 primarily due to higher media costs and increased sponsorships of collegiate and professional teams and new events, including the National Football League Scouting Combine. As a percentage of net revenues, marketing costs decreased to 10.3% for the three months ended September 30, 2009 from 10.7% for the same period in 2008 primarily due to a timing shift in marketing costs for specific customers, partially offset by the items noted above.
Selling costs increased $3.9 million to $17.7 million for the three months ended September 30, 2009 from $13.8 million for the same period in 2008. This increase was primarily due to higher personnel and other costs incurred for the continued expansion of our factory house outlet stores and higher personnel costs mainly related to increased funding for our performance incentive plan as compared to the prior year period. As a percentage of net revenues, selling costs increased to 6.5% for the three months ended September 30, 2009 from 5.9% for the same period in 2008 due to the items noted above.
Product innovation and supply chain costs increased $4.1 million to $20.2 million for the three months ended September 30, 2009 from $16.1 million for the same period in 2008 primarily due to increased personnel costs for the build out of our footwear and apparel product design and product creation teams, as well as increased funding for our performance incentive plan as compared to the prior year period. In addition this increase was related to higher distribution facilities operating costs to support our growth in net revenues. As a percentage of net revenues, product innovation and supply chain costs increased to 7.5% for the three months ended September 30, 2009 from 6.9% for the same period in 2008 due to higher personnel costs for the build out of our footwear and apparel design and product creation teams.
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Corporate services costs increased $4.3 million to $21.4 million for the three months ended September 30, 2009 from $17.1 million for the same period in 2008 primarily due to higher personnel costs for the increased funding for our performance incentive plan as compared to the prior year period and additional corporate personnel necessary to support our growth. In addition this increase was due to higher costs for consumer insight research. As a percentage of net revenues, corporate services costs increased to 7.9% for the three months ended September 30, 2009 from 7.4% for the same period in 2008 primarily due to the items noted above.
Income from operations increased $0.6 million, or 1.3%, to $47.1 million for the three months ended September 30, 2009 from $46.5 million for the same period in 2008. Income from operations as a percentage of net revenues decreased to 17.5% for the three months ended September 30, 2009 from 20.0% for the same period in 2008. This decrease was a result of an increase in selling, general and administrative expenses, and a decrease in gross profit as a percentage of net revenues as discussed above.
Interest expense, netincreased $0.4 million to $0.5 million for the three months ended September 30, 2009 from $0.1 million for the same period in 2008. This increase was primarily due to increased fees related to our new revolving credit facility during the three months ended September 30, 2009.
Other income (expense), net increased $1.7 million to $0.1 million for the three months ended September 30, 2009 from ($1.6) million for the same period in 2008. This increase was primarily due to gains on foreign currency exchange rate changes on transactions denominated in the Euro and Canadian Dollar, largely offset by losses on our derivative financial instruments for the three months ended September 30, 2009 as compared to foreign currency exchange rate losses, partially offset by derivative financial instrument gains for the same period in 2008.
Provision for income taxes increased $1.4 million to $20.5 million during the three months ended September 30, 2009 from $19.1 million during the same period in 2008. Our effective tax rate was 43.9% for the three months ended September 30, 2009 compared to 42.6% during the same period in 2008. The effective tax rate for the three months ended September 30, 2009 was higher than the effective tax rate for the three months ended September 30, 2008 primarily due to an increase in the projected non-deductible expenses in the current year. Our annual 2009 effective rate is expected to be approximately 44.3%, which is lower than the 2008 annual effective tax rate of 45.3% due to certain sourcing and tax strategies implemented in 2009.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Net revenues increased $88.2 million, or 16.2%, to $634.2 million for the nine months ended September 30, 2009 from $546.0 million for the same period in 2008. This increase was primarily the result of an increase in our footwear and apparel net sales as noted in the product category table below:
Nine Months Ended September 30, | ||||||||||||
(In thousands) | 2009 | 2008 | $ Change | % Change | ||||||||
Apparel | $ | 459,706 | $ | 426,480 | $ | 33,226 | 7.8 | % | ||||
Footwear | 127,475 | 75,629 | 51,846 | 68.6 | ||||||||
Accessories | 23,548 | 22,264 | 1,284 | 5.8 | ||||||||
Total net sales | 610,729 | 524,373 | 86,356 | 16.5 | ||||||||
License revenues | 23,465 | 21,592 | 1,873 | 8.7 | ||||||||
Total net revenues | $ | 634,194 | $ | 545,965 | $ | 88,229 | 16.2 | % | ||||
Net sales increased $86.3 million, or 16.5%, to $610.7 million for the nine months ended September 30, 2009 from $524.4 million during the same period in 2008 as noted in the table above. The increase in net sales primarily reflects:
$51.8 million increase in footwear sales driven primarily by our running footwear launch during the first quarter of 2009;sales; and
unit growth driven by increased distribution and new offerings in multiple product categories, most significantly in our fitness,training, base layer, underwear and golf categories, partially offset by
$14.0 million decrease in footwear sales to $43.0 million. We previously indicated running and training and underwear categories.footwear revenues were expected to decline in 2010 compared with 2009.
License revenues increased $1.9$1.2 million, or 8.7%24.6%, to $23.5$6.3 million for the ninethree months ended September 30, 2009March 31, 2010 from $21.6$5.1 million during the same period in 2008.2009. This increase in license revenues was thea result of additionalincreased sales by certainour licensees due to increased distribution new product offerings and continued unit volume growth, as well asalong with new licensinglicense agreements for team uniforms and custom-molded mouth guards.
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Gross profit increased $34.9$18.4 million to $298.9$107.6 million for the ninethree months ended September 30, 2009March 31, 2010 from $264.0$89.2 million for the same period in 2008.2009. Gross profit as a percentage of net revenues, or gross margin, decreased 130increased 230 basis points to 47.1%46.9% for the ninethree months ended September 30, 2009March 31, 2010 compared to 48.4%44.6% during the same period in 2008.2009. The decreaseincrease in gross margin percentage was primarily driven by the following:
increased footwearmore favorable apparel product mix and apparel liquidationssourcing relative to third parties,margins, as well as improved outbound freight costs, accounting for an approximate 60130 basis point decrease;
increased inventory reserves, accounting for an approximate 50 basis point decrease; and
less favorable apparel product mix relative to margins, partially offset by improved apparel costing, accounting for an approximate 40 basis point decrease; partially offset byincrease;
increased direct to consumer higher margin sales, accounting for an approximate 2090 basis point increase.increase; and
decreased sales returns, markdowns and inventory reserves, partially offset by increased footwear and apparel liquidations accounting for an approximate 85 basis point increase; partially offset by
unfavorable wholesale footwear mix and price changes year over year, accounting for an approximate 75 basis point decrease.
Selling, general and administrative expenses increased $30.5$12.7 million to $240.5$94.0 million for the ninethree months ended September 30, 2009March 31, 2010 from $210.0$81.3 million for the same period in 2008.2009. As a percentage of net revenues, selling, general and administrative expenses decreasedincreased to 37.9%41.0% for the ninethree months ended September 30, 2009March 31, 2010 from 38.5%40.6% for the same period in 2008 partially driven by the significant revenue growth from our running footwear launch. In addition, these2009. These changes were alsoprimarily attributable to the following:
Marketing costs increased $6.7decreased $2.5 million to $82.0$31.2 million for the ninethree months ended September 30, 2009March 31, 2010 from $75.3$33.7 million for the same period in 2008 primarily2009 due to increased sponsorships of collegiatethe in-store brand, print and professional teams and new events, including the National Football League Scouting Combine, and increased marketing costs for specific customers, including our in-store brandmedia campaign supporting the introduction of our performance running footwear. These increases werefootwear during the prior year period. This decrease was partially offset by lower mediaan increase in sponsorship of collegiate teams and print expenditures in 2009.professional athletes and digital advertising. As a percentage of net revenues, marketing costs decreased to 12.9%13.6% for the ninethree months ended September 30, 2009March 31, 2010 from 13.8%16.8% for the same period in 20082009 primarily due to lower media and print expenditures costs in 2009, partially offset by the other items noted above.
Selling costs increased $8.5$5.0 million to $47.5$19.7 million for the ninethree months ended September 30, 2009March 31, 2010 from $39.0$14.7 million for the same period in 2008.2009. This increase was primarily due to higher personnel and other costs incurred for the continued expansion of our directfactory house stores and higher selling personnel costs in other areas for the three months ended March 31, 2010 as compared to consumer channel.the same period in 2009. As a percentage of net revenues, selling costs increased to 7.5%8.6% for the ninethree months ended September 30, 2009March 31, 2010 from 7.1%7.4% for the same period in 20082009 primarily due to higher personnel and other costs incurred for the item noted above, partially offset by decreased apparel selling personnel costs as a percentagecontinued expansion of net revenues.our factory house stores.
Product innovation and supply chain costs increased $7.3$5.8 million to $53.6$21.9 million for the ninethree months ended September 30, 2009March 31, 2010 from $46.3$16.1 million for the same period in 20082009 primarily due to higher personnel costs for the build outdesign and sourcing of our footwear and apparel design andexpanding product creation teamslines and higher distribution facilities operating and personnel costs to support our growth in net revenues. As a percentage of net revenues, product innovation and supply chain costs remained unchanged at 8.5%increased to 9.6% for the ninethree months ended September 30,March 31, 2010 from 8.0% for the same period in 2009 and 2008.primarily due to the items noted above.
Corporate services costs increased $8.0$4.4 million to $57.4$21.2 million for the ninethree months ended September 30, 2009March 31, 2010 from $49.4$16.8 million for the same period in 20082009. This increase was attributable primarily due to higher personnel costs for the increased funding for our performance incentive plan as compared to the prior year period and additional corporate personnel and facility costs necessary to support our growth. In addition, this increase was due to higher company-wide stock-based compensation and higher allowances for bad debts related to the current economic conditions. As a percentage of net revenues, corporate services costs remained unchanged at 9.0%increased to 9.2% for the ninethree months ended September 30,March 31, 2010 from 8.4% for the same period in 2009 and 2008.primarily due to the items noted above.
Income from operations increased $4.2$5.7 million, or 7.9%72.0%, to $58.3$13.6 million for the ninethree months ended September 30, 2009March 31, 2010 from $54.1$7.9 million for the same period in 2008.2009. Income from operations as a percentage of net revenues decreasedincreased to 9.2%5.9% for the ninethree months ended September 30, 2009March 31, 2010 from 9.9%4.0% for the same period in 2008.2009. This decreaseincrease was a result of a decrease in gross profit as a percentage of net revenues, partially offset by a decrease in selling, general and administrative expenses as a percentage of net revenues asthe items discussed above.
Interest expense, netincreased $1.4decreased $0.4 million to $1.9$0.5 million for the ninethree months ended September 30, 2009March 31, 2010 from $0.5$0.9 million for the same period in 2008.2009. This increasedecrease was primarily due to the write off of deferred financing costs related to the termination of our prior revolving credit facility and increased costs for our new revolving credit facility during the ninethree months ended September 30,March 31, 2009.
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Other expense,income (expense), net decreased $1.2$0.7 million to $0.3($0.7) million for the ninethree months ended September 30, 2009March 31, 2010 from $1.5 million$12.5 thousand for the same period in 2008.2009. This decrease was primarily due to gainshigher losses on foreign currency exchange rate changes on transactions denominated in the Euro and Canadian Dollar, largelypartially offset by lossesgains on our derivative financial instruments for the ninethree months ended September 30, 2009March 31, 2010 as compared to foreign currency exchange rate losses, partially offset by derivative financial instrument gains for the same period in 2008.2009.
Provision for income taxes increased $2.5$2.1 million to $24.6$5.2 million during the nine monthsquarter ended September 30, 2009March 31, 2010 from $22.1$3.1 million during the same period in 2008. Our2009. For the three months ended March 31, 2010, our effective tax rate was 43.8% for the nine months ended September 30, 200942.0% compared to 42.5% during43.8% for the same period in 2008.2009. The effective tax rate for the ninethree months ended September 30, 2009March 31, 2010 was higherlower than the effective tax rate for the ninethree months ended September 30, 2008March 31, 2009 primarily due to an increasedecreased losses in the projected non-deductible expensesforeign subsidiaries and certain tax strategies implemented in the current year.2010. Our annual 20092010 effective tax rate is expected to approximate 44.3% which is lower than the 2008be improved from our 2009 annual effective tax rate of 45.3%43.2% due to certain sourcing and tax strategies implemented in 2009.the drivers for the quarter noted above.
Seasonality
Historically, we have recognized a significant portion of our income from operations in the last two quarters of the year, driven by increased sales volume of our products during the fall selling season, reflecting our historical strength in fall sports, and the seasonality of our higher priced COLDGEAR® line. Similar to 2008 and in addition to the items noted above, a larger portion of our income from operations is expected to be in the last two quarters of 2009 partially due to the shift in the timing of marketing investments to the first two quarters of 2009 as compared to prior years. The majority of our net revenues were generated during the last two quarters in each of 2008, 20072009 and 2006.2008. The level of our working capital generally reflects the seasonality and growth in our business. We generally expect inventory, accounts payable and certain accrued expenses to be higher in the second and third quarters in preparation for the fall selling season.
Financial Position, Capital Resources and Liquidity
Our cash requirements have principally been for working capital and capital expenditures. Working capital is primarily funded from cash flows provided by operating activities and cash and cash equivalents on hand. Our working capital requirements generally reflect the seasonality and growth in our business as we recognize a significant increase in sales leading up to the third quarter. We fund our working capital, (primarily inventory)primarily inventory, and capital investments from cash flows provided by operating activities, cash and cash equivalents on hand and borrowings available under our revolving credit and long term debt facilities. Our working capital requirements have generally reflected the seasonality and growth in our business as we have recognized an increase in sales leading up to the fall selling season. Our capital investments have included expanding our in-store fixture and branded concept shop program, improvements and expansion of our distribution and corporate facilities to support our growth, leasehold improvements to our new retailfactory house and specialty stores and the investment and improvements in information technology systems.
While our Enterprise Resource Planning system and a warehouse management system.
We continue to focus remains on our four main components of inventory management including improving our planning capabilities, managing our inventory purchases, reducing our production lead times and selling excess inventory through our factory house outlet stores and other liquidation channels.channels, we will concentrate on improving our service levels in order to better meet consumer demand while also increasing our safety stock in core product offerings. Core product offerings are products that we plan to have
available for sale over the next twelve months and beyond at full price. We strive for improved inventory turns over the long term.
In January 2009, we terminated our prior $100.0 million revolving credit facility and entered into a credit agreement which provides for a committed revolving credit facility of up to $200.0 million based on our qualified domestic inventory and accounts receivable balances. We believe that our cash and cash equivalents on hand, cash from operations and borrowings available to us under our revolving credit and long term debt facilities will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next twelve months. We may require additional capital to meet our longer term liquidity and future growth needs. Although we believe that we have adequate sources of liquidity further weakening ofover the long term, a prolonged economic conditionsrecession or a slow recovery could adversely affect our business and liquidity. In addition, continued instability in the capital markets could adversely affect our ability to obtain additional capital to grow our business and will affect the cost and terms of such capital.
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Cash Flows
The following table presents the major components of net cash flows provided by and used in operating, investing and financing activities for the periods presented:
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||
(In thousands) | 2009 | 2008 | 2010 | 2009 | ||||||||||
Net cash provided by (used in): | ||||||||||||||
Operating activities | $ | 25,657 | $ | 6,553 | $ (11,776 | ) | $ (1,793 | ) | ||||||
Investing activities | (16,084 | ) | (33,709 | ) | (7,479 | ) | (8,063 | ) | ||||||
Financing activities | (20,071 | ) | 26,681 | (703 | ) | (27,399 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | 1,832 | 39 | (1,377 | ) | 785 | |||||||||
Net decrease in cash and cash equivalents | $ | (8,666 | ) | $ | (436 | ) | $ (21,335 | ) | $ (36,470 | ) | ||||
Operating Activities
Operating activities consist primarily of net income adjusted for certain non-cash items. Adjustments to net income for non-cash items include depreciation and amortization, unrealized foreign currency exchange rate gains and losses, stock-based compensation, losses on disposals of property and equipment, stock-based compensation, deferred income taxes and changes in reserves for doubtful accounts, returns, discounts and inventories. In addition, operating cash flows include the effect of changes in operating assets and liabilities, principally inventories, accounts receivable, income taxes payable and receivable, prepaid expenses and other assets, accounts payable and accrued expenses.
Cash provided byused in operating activities increased $19.1$10.0 million to $25.7$11.8 million for the ninethree months ended September 30, 2009March 31, 2010 from cash provided byused in operating activities of $6.6$1.8 million during the same period in 2008.2009. The increase in cash provided byused in operating activities was due to decreasedincreased net cash outflows from operating assets and liabilities of $23.1$14.8 million, partially offset by additional net income of $3.2 million and adjustments to net income for non-cash items which decreased $5.6increased $1.6 million period over period, and anperiod. The increase in net income of $1.7 million. The decrease in cash outflows related to changes in operating assets and liabilities period over period was primarily driven by the following:
an increase in accrued expenses and other liabilities of $14.3 million during the nine months ended September 30, 2009 as compared to the same period in 2008 primarily due to lower performance incentive plan payouts during the nine months ended September 30, 2009 as compared to the same period in 2008, as well as higher accruals to account for increased funding for our performance incentive plan as of September 30, 2009 as compared to September 30, 2008, and
a highersmaller decrease in inventory of $27.0$15.0 million, partially offset by a smaller increase in accounts payable of $10.3 million, which was primarily driven by the operational initiatives put in place to improve our inventory management, increased liquidation sales to third parties and a larger percentage of products shipped directly from our suppliers to our customers partially offset by for the introduction of our running footwear during the three months ended March 31, 2009; and
a decreaselarger increase in accounts payablereceivable of $22.5$11.2 million in the first three months of 2010 as compared to the same period in 2009 primarily due to the lowera 14.4% increase in inventory levels.net sales period-over-period.
Adjustments to net income for non-cash items decreasedincreased in the ninethree months ended September 30, 2009March 31, 2010 as compared to the same period of the prior year primarily due to unrealized foreign currency exchange rate gains in the 2009 period as compared tohigher unrealized foreign currency exchange rate losses in the 2008 period.2010 period as compared to the prior period and higher depreciation and amortization expense, partially offset by lower reserves for inventory during the three months ended March 31, 2010.
Investing Activities
Cash used in investing activities, which includes capital expenditures and the purchase of trust owned life insurance policies, decreased $17.6$0.6 million to $16.1$7.5 million for the ninethree months ended September 30, 2009March 31, 2010 from $33.7$8.1 million for the same period in 2008.2009. This decrease in cash used in investing activities is primarily due to lower investments in our direct to consumer channel, our distribution facilities, our in-store fixture program and branded concept shops, partially offset by increased investments in our direct to consumer sales channel and our information technology initiatives. In addition, cash used in investing activities decreased due to the lower purchase of trust owned life insurance policies.corporate facilities.
Capital investments for the full year 20092010 are anticipated to be in the range of $30.0$35.0 million to $35.0$40.0 million, which is below the $41.1 million invested during the full year 2008, and includeincludes shifting some investments in the build out of our new factory house outlet stores, improvements at our distribution facilities and additional branded concept shops and in-store fixtures.from 2009 to 2010.
Financing Activities
Cash used in financing activities increased $46.8decreased $26.7 million to $20.1$0.7 million for the ninethree months ended September 30, 2009March 31, 2010 from cash provided by financing activities of $26.7$27.4 million for the same period in 2008.2009. This increasedecrease was primarily due to additional net paymentsthe final payment made on our prior revolving credit and long term debt facilities infacility that was terminated during the 2009 period versusand deferred financing costs related to our current revolving credit facility entered during the 2008 period, partially offset by higher excess tax benefits from stock-based compensation arrangements and proceeds from the exercise of stock options and other stock issuances.2009 period.
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Revolving Credit Facility Agreement
In January 2009, we entered intoWe have a revolving credit facility with certain lending institutions and terminated our prior revolving credit facility in order to increase our available financing and to expand our lending syndicate. In conjunction with the termination of the prior revolving credit facility, we repaid the then outstanding balance of $25.0 million and did not borrow under the revolving credit facility through October 31, 2009. In the short term, we may borrow under the revolving credit facility to increase our cash position.
institutions. The revolving credit facility has a term of three years, expiring in January 2012, and provides for a committed revolving credit line of up to $200.0 million based on our qualified domestic inventory and accounts receivable balances. The commitment amount under the revolving credit facility may be increased by an additional $50.0 million, subject to certain conditions and approvals per the credit agreement. We incurred and capitalized $1.4 million in deferred financing costs in connection with the revolving credit facility. The borrowing capacity, defined as the product of the remaining term and the maximum available credit of a financing agreement, of the new revolving credit facility is greater than the prior facility. In addition, certain lenders included in the prior revolving credit facility are also included in the new revolving credit facility. Thus, unamortized deferred financing costs of $0.4 million relating to our prior revolving credit facility were expensed during the nine months ended September 30, 2009 and $0.1 million of deferred financing costs were added to the deferred financing costs of the new revolving credit facility and will be amortized over the life of the new revolving credit facility.
The revolving credit facility may be used for working capital and general corporate purposes. It is collateralized by substantially all of our assets and the assets of our domestic subsidiaries (other than our trademarks), and by a pledge of 65% of the equity interests of substantially all of our foreign subsidiaries. Up to $5.0 million of the revolving credit facility may be used to support letters of credit, of which $3.5 million was outstanding as of September 30, 2009.March 31, 2010. We must maintain a certain leverage ratio and fixed charge coverage ratio as defined in the credit agreement. As of September 30, 2009,March 31, 2010, we were in compliance with these financial covenants. The revolving credit facility also provides our lenders with the ability to reduce the borrowing base, even if we are in compliance with all conditions of the revolving credit facility, upon a material adverse change to our business, properties, assets, financial condition or results of operations. The revolving credit facility contains a number of restrictions that limit our ability, among other things, and subject to certain limited exceptions, to incur additional indebtedness, pledge our assets as security, guaranty obligations of third parties, make investments, undergo a merger or consolidation, dispose of assets, or materially change our line of business. In addition, the revolving credit facility includes a cross default provision whereby an event of default under other debt obligations, as defined in the credit agreement, will be considered an event of default under this credit agreement.
Borrowings under the revolving credit facility bear interest based on the daily balance outstanding at LIBOR (with LIBOR subject to a rate floor of 1.25%) plus an applicable margin (varying from 2.0% to 2.5%) or, in certain cases a base rate (based on the prime rate or as otherwise specified in the credit agreement, with the base rate subject to a rate floor of 2.25%) plus an applicable margin (varying from 1.0% to 1.5%). The revolving credit facility also carries a commitment fee varying from 0.38% to 0.5% of the committed line amount less outstanding borrowings and letters of credit. The applicable margins are calculated quarterly and vary based on our leverage ratio as set forth in the credit agreement.
Prior to entering the revolving credit facility in January 2009, we terminated our prior $100.0 million revolving credit facility. In conjunction with the termination of the prior revolving credit facility, we repaid the then outstanding balance of $25.0 million. The prior revolving credit facility was also collateralized by substantially all of our assets, other than our trademarks, and included covenants, conditions and other terms similar to our newcurrent revolving credit facility.
As of September 30, 2009,March 31, 2010, our net availability was $158.7$123.9 million based on our eligible domestic inventory and accounts receivable balances. The weighted average interest rate on the balances outstanding under the prior revolving credit facility was 3.5%1.4% for the three months ended September 30, 2008, and 1.4% and 3.5%March 31, 2009. No balances were outstanding under the current revolving credit facility during the ninethree months ended September 30, 2009March 31, 2010 and 2008, respectively.2009.
Long Term Debt
In March 2005, we entered into an agreementWe have long term debt agreements with various lenders to finance the acquisition of or lease of up to $17.0 million in qualifying capital investments. Loans under this agreementthese agreements are collateralized by a first lien on the related assets acquired. The agreement isAs these agreements are not a committed facility, withfacilities, each advance under the agreementis subject to approval by the lender’s approval. In March 2008, the lender agreed to increase the maximum financing under the agreement to $37.0 million.
In May 2008, we entered into an additional agreement to finance the acquisition or lease of up to $40.0 million in qualifying capital investments. Loans under this additional agreement are collateralized by a first lien on the assets acquired. This additional agreement is not a committed facility, with each advance under the agreement subject to the lender’s approval.
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Theselenders. Additionally, these agreements include a cross default provision whereby an event of default under other debt obligations, including theour revolving credit facility, agreement, will be considered an event of default under these agreements. In addition, theseThese agreements require a prepayment fee if we pay outstanding amounts outstanding ahead of the scheduled term. Through September 30, 2009, we have financed $36.6 million of property and equipment under these agreements.terms. The terms of our revolving credit facility limit the total amount of additional financing under these agreements to $35.0 million, of which $31.4$27.4 million was available as of September 30, 2009.
As of September 30,March 31, 2010. At March 31, 2010, December 31, 2009 and DecemberMarch 31, 2008,2009, the outstanding principal balances were $18.1balance under these agreements was $17.9 million, $20.1 million and $20.1$18.3 million, respectively, under these agreements. Advancesrespectively. Currently, advances under these agreements bear interest rates which are fixed at the time of each advance. The weighted average interest ratesrate on outstanding borrowings were 6.0% andwas 5.9% for each of the three months ended September 30,March 31, 2010 and 2009, and 2008, respectively, and 6.0% and 6.1% for the nine months ended September 30, 2009 and 2008, respectively.
We monitor the financial health and stability of our lenders under our revolving credit and long term debt facilities,facilities; however, current significant instability in the credit markets could negatively impact lenders and their ability to perform under their facilities.
Contractual Commitments and Contingencies
There have been no significant changes to the contractual obligations reported in our 20082009 Form 10-K other than those which occur in the normal course of business (primarily changes in our product purchase obligations which fluctuate throughout the year as a result of our seasonality).
Off-Balance Sheet Arrangements
In connection with various contracts and agreements, we have agreed to indemnify counterparties against certain third party claims relating to the infringement of intellectual property rights and other items. Based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnifications is not material to our financial position or results of operations.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.States. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect our reported revenues and expenses. Judgments must be made about the disclosure of contingent liabilities as well. Actual results could be significantly different from these estimates.
Our significant accounting policies are described in Note 2 of the audited consolidated financial statements included in our 20082009 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 judgmentjudgments and estimates on the part of management in its application. Our estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. For a complete discussion of our critical accounting policies, see the “Critical Accounting Policies” section of the MD&A in our 20082009 Form 10-K. There have been no significant changes to our critical accounting policies during the first ninethree months of 20092010 other than the balance sheetchange in the accounting treatment of certain sales markdowns asand discounts noted below.
Sales Returns, Allowances, Markdowns and Discounts
We record reductions to revenue for estimated customer returns, allowances, markdowns and discounts. We base our estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns markdowns and allowances that have not yet been received by us. We base our estimates for customer returns and allowances primarily on anticipated sales volume throughout the year.markdowns. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from our estimates. If we determined that actual or expected returns or allowances were significantly greater or lower than the reserves we had established, we would record a reduction or increase, as appropriate, to net sales in the period in which we made such a determination. Provisions for customer specific discounts based on contractual obligations with certain major customers are recorded as reductions to net sales.
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Reserves for returns allowances, certain markdowns and certain discountsallowances are recorded as an offsetoffsets to accounts receivable as settlements are made through offsets to outstanding customer invoices. The majorityBeginning in the first quarter of 2010, reserves for markdowns and discounts earned by customers in the period arewere recorded as liabilities withinoffsets to accounts receivable as settlements were made through offsets to outstanding customer invoices. Historically, the majority of these amounts were recorded as accrued expenses as they stipulate settlements to bewere made through our cash disbursements. In addition, certain markdowns expected to be paid to customers through cash disbursements are recorded as liabilities within accrued expenses.
Recently IssuedAdopted Accounting Standards
In June 2009, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). This amendment requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE. The amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE. Finally, an enterprise will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment is effective for financial statements issued for annual periods beginning after November 15, 2009, and for interim periods within the first annual period. We are currently evaluating the impactThe adoption of this amendment on our consolidated financial statements.
Recently Adopted Accounting Standards
In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”). The Codification will become the single source of authoritative generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification is non-authoritative. The adoption of the Codification did not have anyhad no impact on our consolidated financial statements.
In May 2009, the FASB issued accounting guidance that establishes accounting and reporting standards for events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In addition, entities must disclose the date through which subsequent events have been evaluated and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The guidance was effective for fiscal years and interim periods ending after June 15, 2009. The adoption of this guidance did not have any impact on our consolidated financial statements.
In June 2008, the FASB issued accounting guidance requiring that unvested stock-based compensation awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) should be classified as participating securities and should be included in the computation of earnings per share pursuant to the two-class method. The provisions of this guidance were required for fiscal years beginning after December 15, 2008. We have adopted this guidance for current period computations of earnings per share, and have updated prior period computations of earnings per share as directed by this guidance. The adoption of this guidance did not have a material impact on our computation of earnings per share. Refer to Note 9 of the consolidated financial statements for further discussion on this accounting guidance.
In June 2008, the FASB issued accounting guidance addressing the determination of whether provisions that introduce adjustment features (including contingent adjustment features) would prevent treating a derivative contract or an embedded derivative on a company’s own stock as indexed solely to the company’s stock. This guidance was effective for fiscal years beginning after December 15, 2008. The adoption of this guidance in the first quarter of 2009 did not have any impact on our consolidated financial statements.
In March 2008, the FASB issued accounting guidance intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. This guidance was effective for the fiscal years and interim periods beginning after November 15, 2008. The adoption of this guidance in the first quarter of 2009 did not have any impact on our consolidated financial statement.
In December 2007, the FASB issued replacement guidance that requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired entity at fair value. This replacement guidance requires transaction costs related to the business combination to be expensed as incurred.
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It was effective for business combinations for which the acquisition date is on or after the start of the fiscal year beginning after December 15, 2008. The adoption of this guidance in the first quarter of 2009 did not have any impact on our consolidated financial statements.
In December 2007, the FASB issued accounting guidance that establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance was effective for fiscal years beginning after December 15, 2008. The adoption of this guidance in the first quarter of 2009 did not have any impact on our consolidated financial statements.
In September 2006, the FASB issued accounting guidance which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. This guidance was effective for fiscal years beginning after November 15, 2007, however the FASB delayed the effective date to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more frequent basis. The adoption of this guidance for nonfinancial assets and liabilities in the first quarter of 2009 did not have any impact on our consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Currency Exchange and Foreign Currency Risk Management and Derivatives
We currently generate a small amount of our consolidated net revenues in Canada and Europe. The reporting currency for our consolidated financial statements is the U.S. dollar. To date, net revenues generated outside of the United States have not been significant. However, as our net revenues generated outside of the United States increase, our results of operations could be adversely impacted by changes in foreign currency exchange rates. For example, if we recognize international
revenues in local foreign currencies (as we currently do in Canada and Europe) and if the U.S. dollar strengthens, it could have a negative impact on our international revenues upon translation of those results into the U.S. dollar upon consolidation of our financial statements. In addition, we are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates on transactions generated by our international subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by inter-company transactions. These exposures are included in other income (expense), net on the consolidated statements of income. Since 2007, we have used
We use foreign currency forward contracts to reduce the risk from exchange rate fluctuations on inter-company transactions and projected inventory purchases for our Canadian subsidiary. Beginning in December 2008, we began usingWe also use foreign currency forward contracts in order to reduce the risk associated with foreign currency exchange rate fluctuations on inter-company transactions for our European subsidiary. We do not enter into derivative financial instruments for speculative or trading purposes.
Based on the foreign currency forward contracts outstanding as of September 30, 2009,March 31, 2010, we receive US Dollars in exchange for Canadian Dollars at a weighted average contractual forward foreign currency exchange rate of 1.091.02 CAD per $1.00 and US Dollars in exchange for Euros at a weighted average contractual foreign currency exchange rate of 0.690.74 EUR per $1.00. As of September 30, 2009,March 31, 2010, the notional value of our outstanding foreign currency forward contracts for our Canadian subsidiary was approximately $20.7$15.4 million with contract maturities of 1 to 2 months,month, and the notional value of our outstanding foreign currency forward contracts for our European subsidiary was approximately $45.0$58.6 million with contract maturities of 1 month. The foreign currency forward contracts are not designated as cash flow hedges, and accordingly, changes in their fair value are recorded in other income (expense), net on the consolidated statements of income. As of September 30, 2009,March 31, 2010, the fair value of our foreign currency forward contracts was ($0.5)a liability of $0.4 million, which isand was included in accrued expenses on the consolidated balance sheet. As of December 31, 2009 and March 31, 2009, the fair value of our foreign currency forward contract was an asset of $0.3 million and $1.4 million, respectively, and was included in prepaid expenses and other current assets on the consolidated balance sheet.
Other income (expense), net included the following amounts related to changes in foreign currency exchange rates and derivative foreign currency forward contracts:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(In thousands) | 2009 | 2008 | 2009 | 2008 | 2010 | 2009 | ||||||||||||||||||
Unrealized foreign currency exchange rate gains (losses) | $ | 3,171 | $ | (1,697 | ) | $ | 6,135 | $ | (1,517 | ) | ||||||||||||||
Unrealized foreign currency exchange rate losses | $ | (3,490 | ) | $ | (1,045 | ) | ||||||||||||||||||
Realized foreign currency exchange rate gains (losses) | 460 | (490 | ) | (340 | ) | (882 | ) | 93 | (889 | ) | ||||||||||||||
Unrealized derivative gains (losses) | (661 | ) | 403 | (1,748 | ) | 750 | (637 | ) | 203 | |||||||||||||||
Realized derivative gains (losses) | (2,874 | ) | 140 | (4,300 | ) | 116 | ||||||||||||||||||
Realized derivative gains | 3,349 | 1,744 |
Although we have entered into foreign currency forward contracts to minimize some of the impact of foreign currency exchange rate fluctuations on future cash flows, we cannot be assured that foreign currency exchange rate fluctuations will not have a material adverse impact on our financial condition and results of operations.
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ITEM 4. 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 of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). 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.
There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or that is reasonably likely to materially affect our internal control over financial reporting.
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The Risk Factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 20082009 have not materially changed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
From July 28, 2009February 1, 2010 through September 14, 2009April 1, 2010, we issued 135.4287.0 thousand shares of Class A Common Stock upon the exercise of previously granted stock options to employees at a weighted average exercise price of $5.65$1.64 per share, for an aggregate amount of consideration of $765.0approximately $471.8 thousand.
The issuance of securities described above were made in reliance upon Section 4(2) under the Securities Act in that any issuance did not involve a public offering or under Rule 701 promulgated under the Securities Act, in that they were offered and sold either pursuant to written compensatory plans or pursuant to written contract relating to compensation, as provided by Rule 701.
Exhibit No. | ||
10.01 | ||
10.02 | Under Armour, Inc. 2006 Non-Employee Director Deferred Stock Unit Plan | |
10.03 | Form of | |
31.01 | Section 302 Chief Executive Officer Certification | |
31.02 | Section 302 Chief Financial Officer Certification | |
32.01 | Section 906 Chief Executive Officer Certification | |
32.02 | Section 906 Chief Financial Officer Certification |
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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. | ||||||||
Date: | By: | /S/ BRAD DICKERSON | ||||||
Brad Dickerson | ||||||||
Chief Financial Officer |
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